The European Central Bank slashed its growth and inflation projections for this year and expects the single-currency economy to contract sharply as the coronavirus, or Covid-19, hurt economic activity severely. ECB President Christine Lagarde presented the latest set of ECB staff macroeconomic projections on Thursday during her post-decision press conference. For this year, the ECB staff projected an 8.7 percent contraction versus the 0.8 percent growth seen in the previous round in March. However, the growth projections for the next two years were raised. The growth outlook for 2021 was increased to 5.2 percent from 1.3 percent, and the forecast for 2022 was raised to 3.3 percent from 1.4 percent. The inflation projections for all three years were lowered amid weaker energy price and an expected significant increase in economic slack. The forecast for this year was cut to 0.3 percent from 1.1 percent.
The outlook for next year was lowered to 0.8 percent from 1.4 percent and the projection for 2022 was eased to 1.3 percent from 1.6 percent. The June Eurosystem staff macroeconomic projections see growth declining at an unprecedented pace in the second quarter of this year, before rebounding again in the second half, crucially helped by the sizeable support from fiscal and monetary policy, Lagarde said in her introductory statement. "Overall, the Governing Council sees the balance of risks around the baseline projection to the downside," Lagarde said.
In the first quarter, the euro area shrunk 3.8 percent from the previous three months.
The ECB staff has projected a 13 percent slump in the second quarter. The economy is expected to rebound somewhat in the third quarter as lockdown restrictions are withdrawn. The baseline is surrounded by an exceptional degree of uncertainty, she said. Hence, the ECB staff presented two scenarios - a mild one and a severe one. In the mild scenario, the economic shock from the Covid-19 is seen as temporary, with a fast and successful containment of the virus allowing restrictions to be removed swiftly. Further, no resurgence of the virus is seen in this. Under this, real GDP would decline by 5.9 percent this year, followed by a strong rebound in 2021. By the end of the horizon, real GDP would almost reach the level of the March 2020 staff projections. Inflation is seen reaching 1.7 percent by 2022. The severe scenario, with a strong resurgence of infections, implies more stringent containment measures that significantly weigh on economic activity. Under this, real GDP is seen crashing 12.6 percent in 2020 and, by the end of the projection horizon, stands around 91/2 percent below its level in the March 2020 staff projections, with the inflation rate at only 0.9 percent in 2022.