On April 30, the ECB communicated that it will leave key ECB interest rates unchanged, as well as an adjustment to its monetary policy tools. The main adjustment related to easing the targeted longer-term refinancing operations (TLTRO III).
Specifically, the ECB reduced the interest rate on TLTRO III operations for the period June 2020 and June 2021 to 50 basis below the average interest rate on the Eurosystem’s main refinancing operation over the same period.
In addition, the ECB announced a new series of pandemic emergency longer-term refinancing operations (PELTROs) in order to support liquidity conditions in the euro area financial system.
More importantly, ECB president Christine Lagarde announced the ECB will be publishing a scenario analysis on the impact of COVID-19 on euro area economic activity. Lagarde referred to the significant declines in economic indicators and surveys that were conducted throughout the euro area. The first quarter of 2020 saw the euro area real GDP decreasing by 3.8 per cent with March being the most disrupted. Second quarter expectations are even more downbeat. Euro area economy is expected to shrink by five per cent to 12 per cent, depending on how the pandemic spread evolves.
Three pronged scenarios were conceived by ECB staff to determine the short-term path of the euro area economy. The first one is a mild scenario where the strict lockdown periods end in the course of May 2020 with rapid advances in medical treatments, a gradual return to normal activity and only temporary economic losses.
The second medium scenario sees a situation in which the strict lockdown ends during the course of May 2020 and is followed by relatively stringent and protracted containment measures with a delay to normal activity and persistent output losses.
In the final severe scenario, a longer-term strict lockdown (end in the course of June 2020) which has only limited success to contain the spread and will require ongoing tough containment measures to remain in place.
The continued effort to prevent the spread of the virus will result in dampened activity until a vaccine is available. ECB projections show that real GDP will fall by around five per cent, eight per cent and 12 per cent under the mild, medium and severe scenarios. What is certain is that real GDP for 2020 will be well below 2019 levels as 2022 is seen to be the year that the euro area should regain ‘more’ normal levels of output.
The faith for the euro area economy will be dependent on the effectiveness of the short-term measures relating to the easing of the lockdowns in countries most impacted by the pandemic. The gradual reduction in measures should be in lockstep and in line with the scientific advice professed by the medical and statistical community.
Intuitively, this health pandemic will have significant repercussions in the short-term, however, with the right policy action, the euro area should come out stronger. This is not rhetoric as the pandemic will spearhead a raft of reforms that would have not been possible if it were not for the life changing impact of COVID-19. To a certain extent, the pandemic is serving as a cornerstone to reinvigorate Europe’s vision for the future.
Disclaimer: This article was issued by Jesmar Halliday, CFA, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.