ECB’s Lagarde Sees Significant GDP Decline In Q4

Eurozone’s economic activity likely declined sharply in the fourth quarter, but less severely than in the second quarter, due to the resurgence in the coronavirus infections that hurt the services sector considerably as some big countries were forced to impose partial lockdown, European Central Bank President Christine Lagarde said Thursday.

“Overall, the incoming data and our staff projections suggest a more pronounced near-term impact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged,” Lagarde said in her post-decision press conference.

Earlier on Thursday, the ECB unleashed a slew of stimulus for the euro area economy, the main measures being an increase in the provision for asset purchases under its pandemic emergency scheme and more favorable condition for targeted loans to banks to boost lending to the real economy.

The bank increased the size of asset purchases under it pandemic emergency purchase programme, or PEPP, by EUR 500 billion to a total of EUR 1,850 billion. The purchase horizon was extended to at least the end of March 2022 from March 2021.

“If favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.

The PEPP envelope can be recalibrated if required to maintain favorable financing conditions to help counter the negative pandemic shock to the path of inflation, she added.

Policymakers also decided to further recalibrate the conditions of the third series of targeted longer-term refinancing operations or TLTRO III and decided to extend the period over which considerably more favorable terms will apply by twelve months, to June 2022.

The ECB also said it will conduct three additional TLTRO III operations between June and December 2021. Further, the bank raised the borrowing limit for counterparties in TLTRO III operations from 50 percent to 55 per ent of their stock of eligible loans.

The central bank left interest rates and the forward guidance on the same unchanged.

Policymakers will continue to monitor developments in the exchange rate, and they stand ready to adjust all of its instruments, as appropriate, the bank reiterated.

Activity in the services sector is being more adversely affected by the new restrictions on social interaction and mobility than activity in the industrial sector, Lagarde pointed out.

“Looking ahead, the news of prospective roll-outs of vaccines allows for greater confidence in the assumption of a gradual resolution of the health crisis,” the ECB chief said.

“However, it will take time until widespread immunity is achieved, while further resurgences in infections, with challenges to public health and economic prospects, cannot be ruled out.”

She also unveiled the latest ECB Staff macroeconomic projections that foresee annual real GDP growth at -7.3 percent this year, 3.9 percent in 2021, 4.2 percent in 2022 and 2.1 percent in 2023.

In September, the ECB Staff had projected 8 percent GDP contraction for this year, 5.0 percent growth for next year and 3.2 percent expansion in 2022. The bank expects GDP to decline by 2.2 percent in the fourth quarter of 2020 and to rebound only marginally in the first quarter of 2021.

The risks surrounding the Eurozone growth outlook remain tilted to the downside, but have become less pronounced, Lagarde noted.

The ECB Staff projected annual inflation at 0.2 percent for this year, 1.0 percent in 2021, 1.1 percent in 2022 and 1.4 percent in 2023. In September, the forecasts were 03 percent for this year, 1.0 percent for next year and 1.3 percent for 2022.

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