The European Central Bank expects the euro-area economy to bounce back from the coronavirus outbreak, Chief Economist Philip Lane said on Friday, playing down concerns that the region could slip into a downturn that requires another interest-rate cut.
Speaking in an interview with Bloomberg TV in New York, Lane acknowledged that the full impact of the disease remains unknown, and that it “definitely” remains a downside risk until it is contained. At the same time, he pointed to robust domestic demand and rising wages as a evidence of the region’s resilience.
“The base case is a V-shape” economic impact, he said. “Even if there is a hit in terms of the initial weeks of 2020, if the recovery happens as we expect in the medium term” then it “remains something that’s not going to change our base case.”
The economy was only just starting to stabilize toward the end of 2019, after more than a year of a manufacturing recession, and the outbreak raised fears of another downturn. Policy makers cautioned against signaling too much optimism at their meeting in January, and the European Commission called the coronavirus a “key downside risk” to its already subdued growth forecasts.
Yet fresh data on Friday showed private-sector economic activity growing at the fastest pace in six months, with services proving resilient. Lane said the figures were “broadly in line with what we expected.”
The ECB is three weeks away from publishing its own quarterly economic projections and Lane said that the coronavirus is a “big headache” for that process. But as long as the impact is concentrated in “the first weeks and months of 2020, this doesn’t particularly have implications for the key medium-term element of our forecast,” he said.
The chief economist reiterated the ECB’s view that there are signs of a gradual improvement in inflation, but the target of just under 2% would be reached quicker if euro-area governments increased their spending. He repeated that message in aspeech in New York. Euro-zone consumer-price growth was reported on Friday at 1.4%.
Doubts have mounted over how much more support the ECB can offer to the economy after more than half a decade of negative interest rates and the resumption last year of a bond-buying program. President Christine Lagarde has started a strategic review of the central bank’s mission, the first in 17 years.
Lane insisted that the ECB still has room to act, saying policy makers are “super clear” that they stand ready to cut rates if necessary.
“The speed at which we can deliver inflation targets may have changed in this low interest rate world,” he said. “But the underlying economics remains the same — the underlying economics will be that central banks can deliver whatever inflation rate they want, but maybe over a different time horizon.”
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