The president of the European Central Bank has said it is “extremely difficult” to know how long the eurozone will be stuck in recession or how deep the downturn will be, as fresh data exposed the sudden loss of business confidence and dynamism in the bloc’s economy.
Christine Lagarde said in a statement to the IMF’s virtual meeting on Thursday that the eurozone was heading for “a large contraction in output” and “rapidly deteriorating labour markets” because of the coronavirus pandemic.
Inflation was expected to continue falling from its already low levels in the short term, she added, adding that the medium term outlook for prices was “surrounded by high uncertainty”.
“Uncertainty is sharply elevated and will remain high, making it extremely difficult to predict the likely extent and duration of the imminent recession and subsequent recovery,” said Ms Lagarde.
The IMF predicted this week that the eurozone economy would shrink by 7.5 per cent this year — the deepest recession the bloc has ever suffered — before partly recovering with growth of 4.7 per cent next year.
Figures published by the French national statistics office on Thursday highlighted how the pandemic has suddenly frozen large swaths of economic activity. The number of new business registrations had fallen by 26 per cent between February and March, the data showed.
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Meanwhile, business confidence in Spain — one of the European countries hit hardest by the pandemic — has collapsed to a record low and three-quarters of companies in the country are pessimistic about their performance, according to a survey published on Thursday by the national statistics office.
In response to the turmoil caused by the pandemic, the ECB last month announced plans to increase its asset purchases by almost €900bn this year, while offering trillions of euros in cheap loans to banks and loosening its collateral rules to make its liquidity easier to access.
In a separate speech on Thursday, ECB executive director Isabel Schnabel said the measures had helped to “stabilise broad funding conditions in the euro area, improve market liquidity and reduce volatility”.
Ms Schnabel, who is responsible for ECB market operations, said that “in a matter of days the pandemic reversed the previous easing of financial conditions” which “threatened to unleash a perilous macro-financial feedback loop”.
Germany, France, Italy, Spain and the Netherlands are now expected to issue more than €1tn of bonds — excluding short-term treasury bills — this year, she said, adding that this figure was likely to rise further in the coming weeks and months.
This partly explains why borrowing costs for most eurozone governments have increased since the coronavirus crisis reached Europe in mid-February, she said, warning that liquidity in sovereign bond markets remained lower than usual.
A sell-off in eurozone debt markets pushed Italy’s 10-year bond yield to a four-week high of more than 1.8 per cent earlier this week. Bond yields rise as prices fall, pushing up funding costs.
Source: Economy - ft.com
