The euro area is facing an “unprecedented” economic decline, the worst since records began. European Central Bank (ECB) President Christine Lagarde paints a picture of a central bank in full-on emergency mode after the bank kept its interest rates unchanged.
Unprecedented Economic Contraction in Eurozone
New data released on Thursday reveals that the 19-member region’s economy contracted significantly to the lowest reading since records began in 1995. Keeping interest rates unchanged, European Central Bank (ECB) President Christine Lagarde told the press:
The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime.
Lagarde continued, “Measures to contain the spread of the coronavirus, covid-19, have largely halted economic activity in all the countries of the euro area and across the world.”
According to data published Thursday by Eurostat, the euro area’s gross domestic product in Q1 2020 fell 3.8% from the previous quarter, or 14.4% on an annualized basis. By comparison, U.S. GDP declined 4.8% on an annualized basis.
Central Bank in Full-On Emergency Mode
The European Central Bank did not make any changes to its asset-buying programs on Thursday, including the €750 billion ($832 billion) Pandemic Emergency Purchase Program (PEPP) introduced in March. The massive stimulus package aims to mitigate some of the economic shock caused by the coronavirus crisis. Lagarde affirmed that policymakers are ready to expand those programs if needed. Pantheon Macroeconomics chief eurozone economist Claus Vistesen was quoted by the media as saying:
The [ECB] president paints a picture of a central bank that is in full-on emergency mode, and which has had to throw out the rulebook for both policy and standard forecasting.
The ECB expects a GDP contraction of between 5% and 12% for the eurozone’s economy this year. The actual decline depends on how long and how effective the lockdowns are in various countries. On Friday, ECB chief economist Philip Lane warned that the economic slump in the second quarter will be “much more pronounced” than at the start of the year because lockdowns were in full force by April.
The economic growth projection by the ECB is in line with that of the International Monetary Fund (IMF), which has foretasted a 7.5% contraction for the eurozone. In April, ECB Vice President Luis de Guindos said he expected the European economy to suffer a worse recession than the rest of the world.
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