ECB President Christine Lagarde gave a stark warning to the eurozone today, warning the area is facing an economic contraction of a magnitude and speed that is unprecedented in peacetime. Measures to contain the spread of the coronavirus, such as nationwide lockdowns, has caused a huge downtown in the labour markets and a significant contraction in economic activity. As a result, the eurozone is heading for a sharp contraction in economic growth.
Speaking at a virtual press conference this afternoon, Ms Lagarde said the bank expects a GDP contraction between five and 12 percent this year – which could have lasting consequences for the UK.
The scale of the contraction depends on the length of the pandemic and government shutdowns.
The ECB President said: “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime.”
She said the eurozone’s decline is likely to steepen before a recovery phase kicks in and warned the duration of the economic decline could not yet be determined.
One political commentator has pointed out that while the warning only applies to the eurozone, of which the UK is not a part of, it does have implications for Britain.
David Herdson, who runs the politics blog PoliticalBetting.com, said the 5-12 percent prediction is hugely significant.
He wrote on Twitter: “Five percent is ballpark equivalent to the 2008 recession.
“12 percent is like nothing Britain has experienced in a century.
“Lagarde’s comments obviously apply to the EU / eurozone but given the similarities in COVID-19 response in the UK, we can take them as reasonably indicative for the UK too.
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“It’s true that the current recession is more ‘artificial’ than that of 2008-9 (or the early 1930s), and the recovery might be rapid if life can rapidly return to the status quo ante.
“But that will be hard because of the legacy of this interruption.”
The political commentator warned the impact of huge government debts would be “immense”.
He said: “Can governments prevent debt snowballing through their economies?
“Somebody is going to have to be liable for payments due these months, or for taking the hit if they’re not due – but how to generate that money when there’s been no income?
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“If GDP does take a 12 percent hit (on the bad side of the range, though not necessarily the worst it could be), then the amount of debt – and bad debt – in the system will be immense, and could easily snarl up banking operations as they assess their own solvency.”
During today’s press conference, Ms Lagarde said the ECB expects to remain in crisis-fighting mode well into next year.
She said: “We are looking at way down and probably out in 2021 in terms of return to a “new normal”.
The ECB President said the bank “very much” hopes the crisis will not become a permanent one.
Her comments follow Eurostat’s figures today, which showed the locked-down eurozone economy was estimated to have shrunk by 3.8 percent in the first quarter of 2020.
In another blow to the area’s economy, Germany announced that the number of people unemployed soared to 2.6 million in April, up from 2.3 million the month before and France confirmed that it had plunged into recession.
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