ECB: possible increase in purchases in response to the fall in GDP

  •   18/05/2020 - 11h01
  •   DEHOUI Lionel

The euro zone has been facing a rather violent recession in its young history for a month now. According to a survey conducted and gathering the opinion of economists, this recession would be worse than expected. It should even lead the ECB (European Central Bank) to make announcements in June on an increase in its bond purchases. So now is the time to find out everything you need to know about this survey. Indeed, the experts involved are 80 in number and are questioned between 11 and 14 May. The latter have lowered their various forecasts, the third time in just over a month. They reviewed the decline in the GDP of the 19 countries linked by the single currency for 2020. They are now expecting a decline of 7.5% instead of the 5.4% initially forecast three weeks ago.

ECB: possible increase in purchases in response to the fall in GDP

GDP by quarter

According to Eurostat data for the first quarter, euro zone GDP fell by 3.8%. But according to the survey, this decline should be stronger in the 2nd quarter and could reach 11.3% (-9.6% in the previous survey). In the third and fourth quarters, GDP is expected to jump by 7.2% and 2.8% respectively. However, the losses of the first half of the year will not be made up.

On the other hand, there may be a contraction in the third quarter under the most pessimistic assumptions. In 2020, the unemployment rate is also expected to rise by 2 points to 9.3%. This is lower than the current rate in the United States. At its meeting on 4 June, the ECB is expected to step up its support by increasing the budget of its Pandemic Emergency Procurement Programme (plus EUR 375 billion).

 

Analysis

This programme (PEPP) was initially endowed with 750 billion in March. To these sums must be added the €20 billion for monthly purchases. This is because of the arrangements in place well before the health crisis. The ECB's balance sheet is expected to reach 6,500 billion at the end of the year according to the survey. Today it is around 5,000 billion. Citi economist Giada Giani believes that monetary policy will almost reach its peak before the end of the recession.

For the time being, its objective is to facilitate the use of fiscal policy. The ECB should achieve this by raising the cost of its purchases while continuing them after this year. Some economists (more than 2/3 of the 28) who have spoken on the subject think that the ECB should follow the example of the US Federal Reserve. It will therefore have to extend its purchases to the bonds of companies whose investment rating has been lost since the beginning of the crisis.

Note: Such an action would put the ECB under fire from new critics when it should already be dealing with the decision of the Constitutional Court in Berlin. In this case, the ECB is called upon to show that its bond purchases are proportionate and necessary. Some economists (more than 22 out of 28) believe that the German court's ruling will not impact the ECB's policy in the long term.