Solid data may not be a good guide to how the eurozone is recovering from its deepest economic crisis in recent memory, the European Central Bank’s (ECB) chief economist said.
Having suffered a historic drop in output in April, the bloc’s economy is starting to revive as some restrictions to limit the spread of the virus are gradually lifted. Surprisingly strong readings from economic surveys have helped raise hopes of a relatively quick, V-shaped recovery.
But Philip Lane said today that while “substantial improvement” in near-term indicators was normal given the depth of the contraction, this data was not a good guide for the future.
Speaking at a webinar organised by the Association of Foreign Banks in Germany, Lane also warned that activity would remain far below its pre-coronavirus levels for an extended period given that many restrictions are still in place.
“Income losses and precautionary savings continue to weigh on consumption,” he said.
“Likewise, weak demand, continued supply constraints and ongoing social distancing restrictions are hampering the normalisation of economic activity.”
Lane said that he was getting more confident that a slew of negative inflation readings — which some expected due to crashing oil prices — could be avoided, but that fiscal measures were crucial.
“The measures we’re taking and also the fiscal measures should keep inflation in positive territory,” Lane said. “We may be more optimistic that negative inflation can be avoided.”
He added that fiscal measures, particularly talks over a €750bn EU recovery package, were also likely to have a major impact on how quickly confidence rebounded.
“The outcome of negotiations about the EU recovery fund will be an important factor in determining the future path for the euro area economy,” Lane said.