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03 juli 2020 Algemeen

(c) DNB

At his participation at a Bloomberg virtual session about the global economic and financial challenges during this COVID19 pandemic, Klaas Knot said: ‘The gradual reopening in recent weeks has confirmed that we have moved past the impact phase of the shock, and can now shift our attention toward the recovery phase. Since early June, recent indicators have surprised on the upside’. At the same time, governor Knot emphasized that ample policy support to the economy will remain important also during the recovery phase. Against this backdrop, he again welcomed the recent proposals to arrive at a European Recovery Fund.

Datum: 3 juli 2020
Locatie:
Webinar Bloomberg
Spreker:
Klaas Knot

1. Outlook

  • All incoming information confirms that the global economy has been hit hard by the COVID-19 crisis.
  • In case of the euro area, in early June we published new projections anticipating a -8.7% drop in GDP in 2020.
  • And this projection was subject to downside risks, as it left open the possibility of more severe scenario’s in case of a strong resurgence in the spread of the virus. Faced with these downside risks, the ECB decided to expand its Pandemic Emergency Purchase Programme (PEPP).


2. The case for continued policy support…

  • It is clear that the policy response observed in crisis phase has been crucial to avert even worse outcomes for now.
  • On the monetary, fiscal and prudential policy side authorities have stepped in forcefully to help the economy establish a foothold as it went into lockdown.
  • The gradual reopening in recent weeks has confirmed that we have moved past the impact phase of the shock, and can now shift our attention toward the recovery phase. Since early June, recent indicators have surprised on the upside:
    - Confidence indicators showed a strong rebound in June to close an otherwise disastrous second
    quarter.
    - Forward-looking confidence indicators already signalled a bottoming-out in May.
    - High-frequency indicators indicated that mobility started to recover from mid-April onwards, albeit
    gradually.
  • So I would say that recent data solidifies the confidence in our baseline scenario with a more favorable balance-of-risks.
  • Yet, even in that baseline scenario, economic activity will only approach the pre-COVID-19 level by the end of our projection horizon in 2022.
  • Looking ahead at the recovery, it is clear that ample policy support to the economy will remain important for an extended period of time.


3. …with an evolving, well-balanced composition…

  • At the same time, we will only learn more about the underlying state of our economy once the recovery unfolds. That will be crucial for the appropriate policy response. Let me highlight two elements:
    - First, the extent to which the impact on the economy will materialize as a demand versus a supply shock is still unknown. While we are fairly confident that in the near-term increased uncertainty implies a strong withdrawal of aggregate demand, in the medium to longer-run negative supply effects can very well gain in relevance as businesses adjust their production processes to the new
    environment. Since the latter would be associated with upward price pressures, they impact on the intensity with which monetary policy can continue to support the economy. In addition, temporary crisis measures may lose traction in terms of necessity and effectiveness when the economy moves along a more stable trajectory.
    - Second, the observed increase in private sector savings as a consequence of crisis-induced uncertainty provides a strong rationale and, in fact, leeway for the public sector to increase spending to lean-against the increased propensity to save. Over a longer horizon, dissipating uncertainty will invoke a resumption of private sector activity for which the public sector might then have to retreat to avoid crowding-out effects. So the pace at which uncertainty dissipates will have important implications for the pace at which fiscal support can be withdrawn. Simultaneously, we have learnt that there are benefits of ensuring that fiscal policy moves consistently with monetary policy..
  • All this implies that the policy mix will continuously have to be adjusted in terms of composition, based on our evolving assessment of the economic outlook.
  • A broad and encompassing policy response is important to ensure that we don’t rely overly on individual measures that could be subject to unintended side effects if they are kept in place for too long.
  • In the previous recovery from the euro area debt crisis, relying too heavily on monetary policy to get the job done might have contributed to perceptions of a “central bank put”, where the ECB bore all of the downside risk to the economy. Such a perception is risky, as it leads to ratcheting up of debt levels and excessive leverage, as has been observed in segments of the corporate sector.


4. …embedded in longer-term policy priorities

  • Hence, an important element was missing there. Monetary policy successfully eliminated slack in the economy, most importantly in the labor market. But a convincing resumption of sustainable, productive investment failed to take hold. This turned out to be a main factor why real income convergence in the euro area stagnated during the last decade.
  • Against this backdrop, I have welcomed the recent proposals to arrive at a European Recovery Fund. This initiative foresees investments in the EU’s important policy priorities, specifically its Green Deal and digitalization agenda, also in those parts of the euro area where public investment has been depressed for quite some time.
  • Moreover, in these times of exceptional uncertainty it would provide an important signal that we do not stop short at only stabilizing our economies, but also take the opportunity to address common longer-term challenges, thereby solidifying the recovery to take root.

  • Let me stop here.