Three key challenges for the ECB

21st September, 2020

Amid signs that Covid-19 infection rates were on the rise once again around Europe, some localised restrictions were reimposed in August, putting a brake on economic activity. Having picked up in July, economic activity lost momentum in the eurozone during the first half of August, according to IHS Markit, as a strengthening manufacturing sector failed to offset a slowdown in services. The Dax Index rose by 5.1% during the month, while the CAC 40 Index climbed by 3.4%.

Business sentiment in the eurozone improved during August, led by the services sector, as companies became more optimistic about the economic outlook. Nevertheless, the European Commission reported that sentiment remains below the long-term average. Meanwhile, the Ifo Institute found that business sentiment in Germany is continuing to improve and reported that the country’s economy is “on the road to recovery”. German companies expect coronavirus-related restrictions on public life to continue for an average of 8.5 months. Service providers anticipate 8.9 months; trade 8.6 months, construction 8.2 months, and manufacturing 7.8 months. The most pessimistic subsector was leisure, which expects restrictions to last for 13 months.

Germany’s GDP has declined more quickly and strongly than during the financial crisis of 2008/09, according to Germany’s Federal Statistical Office, which reported a 10.1% contraction during the second quarter. Germany’s economic development has been “abruptly slowed” by the pandemic, which has also affected the labour market.

German factory orders rose sharply during June, posting month-on-month growth of 27.9% compared with May’s growth rate of 10.4%. On an annualised basis, factory orders declined by 11.3% following May’s drop of 29.3%, although volumes remained subdued compared with pre-pandemic levels. Across the eurozone, the manufacturing sector posted its first increase in production since the start of 2019 during July, according to IHS Markit, although demand was dampened by ongoing weakness in international trade.

Speaking at this year’s “virtual” Jackson Hole symposium, the European Central Bank’s (ECB’s) Chief Economist Philip Lane outlined three key challenges for the ECB: to stabilise markets; to protect credit supply; and to neutralise the pandemic-related downside risks to the inflation path. However, it will be necessary to address the first two challenges in order to achieve the central bank’s inflation aim, as it is “problematic” to operate an effective monetary policy against a backdrop of market instability or a credit crunch.

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This article was sourced from Adviser-Hub.co.uk.

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