ECB’s Latest Stimulus Expected to Have Little Impact on Eurozone Economy

January 18, 2021 Updated: January 18, 2021

BENGALURU—The European Central Bank’s new policy package will have little effect on the eurozone’s coronavirus-ravaged economy, according to the forecasts of a Reuters poll of economists, who nearly halved their outlook for first-quarter growth.

Despite the ECB’s decision to top up its pandemic emergency purchases by half a trillion euros to 1.85 trillion euros and extend the program for nine months, the bloc’s economic outlook remains bleak.

The Reuters poll consensus of over 80 economists forecast the eurozone economy shrank 2.5 percent last quarter after expanding 12.5 percent in the third quarter and was expected to grow 0.6 percent this quarter, nearly half the 1.1 percent predicted a month ago.

It was then expected to expand 2.3 percent, 1.9 percent, and 1.0 percent in the second, third, and fourth quarters, largely unchanged from last month’s forecasts collected just before the ECB introduced more stimulus.

Over 70 percent of economists, or 28 of 39 who replied to an additional question, said the ECB’s latest policy moves would have little impact on the eurozone economy. The others said it would provide a significant boost.

“Interest rates are already so low and policy is ultra-loose, so for now, monetary policy cannot impact investment or consumer demand. Thus we do not think the ECB can influence the economy strongly at this time,” said Christoph Weil, senior economist at Commerzbank.

“We expect a bitter couple of months. Lockdowns will dampen the economy and we expect falling GDP in the last quarter of 2020 and in the first quarter of this year. So technically a recession.”

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Of the participants in the Jan. 11–15 survey, over 25 percent expected the eurozone—where growth plumbed to an historic low in the first half of 2020—to have again entered a technical recession, defined as two consecutive quarters of contraction.

On an annualized basis, the economy was expected to have shrunk 7.3 percent in 2020, roughly in line with the last poll, but for this year, the median was downgraded to 4.5 percent from 5.0 percent last month. For 2022, the growth forecast was upgraded to 3.9 percent from 3.5 percent.

“The start of the year continues to bring bad news for Europe as the health situation deteriorates. With lockdowns already being extended in several countries, short-term risks to the economic outlook are clearly skewed to the downside, especially as the vaccination roll-out is still slow,” said Angel Talavera, head of Europe economics at Oxford Economics.

“The new and more transmissible variants of the virus mean a further deterioration could happen very quickly.”

Over 70 percent of respondents, or 30 of 42, who replied to a separate extra question said the economy would return to pre-crisis levels within two years, including six who said within a year. The others said it would be more than two years.

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The two largest eurozone economies were expected to grow much slower in 2021 compared with expectations in October. Germany was forecast to grow 3.7 percent, down from 4.6 percent, and the outlook for France was downgraded to 5.9 percent from 6.9 percent.

Eurozone inflation, which remained in negative territory for five straight months last year, was expected to remain below the ECB’s target of just under 2 percent, averaging 0.9 percent in 2021 and 1.3 percent in 2022.

A slim majority, over 52 percent of economists, or 21 of 40 who answered a separate question, said a significant pick-up in inflation was likely. Seventeen said it would remain around the same as 2020 and two said deflation was more likely.

“If history is any guide, any too-high expectations of inflation can be shattered. But we have very supportive fiscal policy and a number of structural factors that could support higher inflation a little further down the road,” said Florian Hense, senior Europe economist at Berenberg.

By Richa Rebello