Frankfurt am Main, 10 June 2020
The euro area economy has been experiencing an unprecedented contraction since the coronavirus (COVID-19) began spreading in Europe. Economic activity declined in the first quarter by 3.6 percent, quarter-on-quarter, driven by the fall in both domestic and foreign demand. Consumer spending plummeted, largely due to the shutdown of non-essential businesses and heightened uncertainty about job prospects. Although employment declined only by 0.2 percent, quarter-on-quarter, in the first quarter of the year, recourse to national employment schemes remained at unprecedented levels. At the same time, business investment is expected to have collapsed on the back of lockdowns, fading demand, increasing uncertainty and vanishing liquidity. Given the global nature of the shock, both nominal exports and imports of goods declined sharply in March and are expected to remain subdued in the coming months.
Incoming data suggest a much larger contraction of the economy in the second quarter. After the projected collapse in the first half of the year, euro area growth is expected to rebound in the second half, supported by monetary and fiscal policy and some pent-up demand. In May, survey indicators suggested that there were some signs of the slump bottoming out alongside the easing of containment measures. Although the euro area economy remains in a deep contraction, consumer and business confidence indicators improved in May. At the same time, there has been an improvement in forward-looking indicators, despite remaining well below their pre-crisis levels, suggesting that firms expect a recovery to take hold in the coming months.
This assessment is also consistent with the June 2020 Eurosystem staff macroeconomic projections for the euro area. After the further severe contraction in the second quarter, real GDP growth is projected to rebound in the second half of the year, with an average growth rate of -8.7 percent in 2020. Over time, economic activity is expected to grow strongly, by 5.2 percent in 2021 and 3.3 percent in 2022. Overall, real GDP will recover only gradually towards pre-crisis levels, remaining below the level expected in the March staff macroeconomic projections throughout the projection horizon. Given the elevated level of uncertainty, the June 2020 projections also include two alternative scenarios, a mild one and a severe one, based on different assumptions regarding the further progression of the virus and the necessary containment measures.
Both monetary and fiscal policies play a crucial role in supporting the recovery in the euro area. Fiscal policies at national and EU level have been crucial in mitigating unemployment risks, bolstering household income and supporting investment by firms. In order to achieve a broad-based recovery, national measures must be backed up by forceful action at the European level. We welcome the new €750 billion EU recovery instrument which consists of €500 billion in grants and €250 billion in loans to Member States.
The sharp contraction in economic activity is also reflected in the inflation slowdown. Headline inflation decreased further to 0.1 percent in May, from 0.3 percent in April, mainly on account of the continued fall in energy prices. Over the coming months, inflation is expected to be close to zero percent, averaging 0.3 percent in 2020, before slowly recovering to 0.8 percent next year and reaching 1.3 percent in 2022. The inflation projection is also subject to unprecedented uncertainty, with a faster recovery in the mild scenario.(...)
The euro area economy has been experiencing an unprecedented contraction since the coronavirus (COVID-19) began spreading in Europe. Economic activity declined in the first quarter by 3.6 percent, quarter-on-quarter, driven by the fall in both domestic and foreign demand. Consumer spending plummeted, largely due to the shutdown of non-essential businesses and heightened uncertainty about job prospects. Although employment declined only by 0.2 percent, quarter-on-quarter, in the first quarter of the year, recourse to national employment schemes remained at unprecedented levels. At the same time, business investment is expected to have collapsed on the back of lockdowns, fading demand, increasing uncertainty and vanishing liquidity. Given the global nature of the shock, both nominal exports and imports of goods declined sharply in March and are expected to remain subdued in the coming months.
Incoming data suggest a much larger contraction of the economy in the second quarter. After the projected collapse in the first half of the year, euro area growth is expected to rebound in the second half, supported by monetary and fiscal policy and some pent-up demand. In May, survey indicators suggested that there were some signs of the slump bottoming out alongside the easing of containment measures. Although the euro area economy remains in a deep contraction, consumer and business confidence indicators improved in May. At the same time, there has been an improvement in forward-looking indicators, despite remaining well below their pre-crisis levels, suggesting that firms expect a recovery to take hold in the coming months.
This assessment is also consistent with the June 2020 Eurosystem staff macroeconomic projections for the euro area. After the further severe contraction in the second quarter, real GDP growth is projected to rebound in the second half of the year, with an average growth rate of -8.7 percent in 2020. Over time, economic activity is expected to grow strongly, by 5.2 percent in 2021 and 3.3 percent in 2022. Overall, real GDP will recover only gradually towards pre-crisis levels, remaining below the level expected in the March staff macroeconomic projections throughout the projection horizon. Given the elevated level of uncertainty, the June 2020 projections also include two alternative scenarios, a mild one and a severe one, based on different assumptions regarding the further progression of the virus and the necessary containment measures.
Both monetary and fiscal policies play a crucial role in supporting the recovery in the euro area. Fiscal policies at national and EU level have been crucial in mitigating unemployment risks, bolstering household income and supporting investment by firms. In order to achieve a broad-based recovery, national measures must be backed up by forceful action at the European level. We welcome the new €750 billion EU recovery instrument which consists of €500 billion in grants and €250 billion in loans to Member States.
The sharp contraction in economic activity is also reflected in the inflation slowdown. Headline inflation decreased further to 0.1 percent in May, from 0.3 percent in April, mainly on account of the continued fall in energy prices. Over the coming months, inflation is expected to be close to zero percent, averaging 0.3 percent in 2020, before slowly recovering to 0.8 percent next year and reaching 1.3 percent in 2022. The inflation projection is also subject to unprecedented uncertainty, with a faster recovery in the mild scenario.(...)
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