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ECB’s Lane: Baseline Forecasts Based on COVID Jab by End-2021

The most recent ECB economic forecasts assume that a vaccine to combat Covid-19 virus could be available by the end of next year, according to the central bank’s chief economist, Philip Lane, on Friday.

The “baseline” estimates assume that “maybe a vaccine will be found by the middle of next year and rolled out by the end of 2021”, Lane told a virtual event held by the Dublin Economics Workshop.

The ECB published new forecasts following a meeting of the rate-setting governing council on Thursday. Gross domestic product is expected to contract by 8.0% in 2020, an improvement on the 8.7% decline estimated back in June.

The Bank affirmed its estimate of consumer price inflation at 0.3% in 2020, well below the ECB’s target of close to below 2.0%. But the risk of a delay to a Covid vaccination could shift attention to the ECB’s so-called “severe scenario”, in which GDP contracts by 10.0% this year, with inflation forecast to remain at an annual rate of 0.3%.

While industrial activity continues to accelerate in the eurozone, even as the service sector rebound appears to have slowed, the bloc’s recovery “is far from complete”, said Lane. One of the biggest questions over future growth is whether “households will be nervous about spending” after months of forced saving during economic lockdown.

ECB projections “assume that the full normalisation of the savings rate will occur only gradually”, Lane wrote in an ECB blog posted earlier on Friday.

The chief economist did not discuss recent appreciation of the euro at the Dublin event; ECB president Christine Lagarde was grilled over exchange rates at a press briefing following Thursday’s governing council meeting.

However, Lane did refer to the “recent appreciation of the euro exchange rate” as a downward influence on future inflation in his blog post. The euro has gained approximately 10% against the dollar since March, but has appreciated by a smaller magnitude against a basket of currencies.

Lane also reiterated the ECB’s support for further fiscal stimulus from euro zone governments, echoing comments from his governing council colleague Isabel Schnabel earlier on Friday.

“Fiscal expansion is indispensable at the current juncture to sustain demand and mitigate the long-term costs of the crisis,” she told a virtual conference hosted by the Berlin-based Centre for European Reform. “Monetary policy can complement these efforts. But by itself, it may not be sufficient to stabilise the economy.”

Laurie Laird

Julie Ros

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