ECB Economic Bulletin (Issue 8/2020)

Economic Bulletin

Issue 8 / 2020

Contents

Economic and monetary developments	2
Overview	2
1	External environment	8
2	Financial developments	16
3	Economic activity	23
4	Prices and costs	29
5	Money and credit	34
6	Fiscal developments	42
Boxes	46
1	The scarring effects of past crises on the global economy	46
2	Liquidity conditions and monetary policy operations in the period from 22
	July to 3 November 2020	53
3	Assessing short-term economic developments in times of COVID-19	59
4	Understanding the impact of the COVID-19 pandemic through an
	import-adjusted breakdown of euro area aggregate demand	64
5	Developments in the tourism sector during the COVID-19 pandemic	68
6	The long-term effects of the pandemic: insights from a survey of leading
	companies	72
7	Assessing wage dynamics during the COVID-19 pandemic: can data on
	negotiated wages help?	76
8	Draft budgetary plans for 2021: a review in times of the COVID-19 crisis
		80
Articles	84

1 The European exchange rate mechanism (ERM II) as a preparatory phase on the path towards euro adoption - the cases of Bulgaria and

	Croatia	84
2	The impact of the COVID-19 pandemic on the euro area labour market	105
3	The digital economy and the euro area	128
Statistics	S1

ECB Economic Bulletin, Issue 8 / 2020 - Contents

1

Economic and monetary developments

Overview

At its monetary policy meeting on 10 December 2020, the Governing Council decided to recalibrate its monetary policy instruments. While the rebound in economic activity in the third quarter was stronger than expected and the prospects for the roll-outof vaccines are encouraging, the coronavirus (COVID-19)pandemic continues to pose serious risks to public health and to the euro area and global economies. The resurgence in COVID-19cases and the associated containment measures are significantly restricting euro area economic activity, which is expected to have contracted in the fourth quarter of 2020. While activity in the manufacturing sector continues to hold up well, services activity is being severely curbed by the increase in infection rates and the new restrictions on social interaction and mobility. Inflation remains very low in the context of weak demand and significant slack in labour and product markets. Overall, the incoming data and the December 2020 Eurosystem staff macroeconomic projections suggest a more pronounced near-termimpact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged. Against this background, the Governing Council decided to recalibrate its monetary policy instruments at its meeting on 10 December 2020.

Economic and monetary assessment at the time of the Governing Council meeting of 10 December 2020

The global economy rebounded strongly in the third quarter of 2020 and this was followed by continued growth momentum at the start of the fourth quarter, but headwinds cloud the near-term economic outlook. While recent news about the development of effective vaccines against the coronavirus has sparked financial market optimism, the short-termglobal economic outlook remains clouded by the pandemic. The significant rise in the number of new COVID-19infections, particularly in advanced economies, has led to the reintroduction of containment measures, although these measures are seen as less disruptive to economic activity than those implemented during the first wave of the pandemic. According to the December 2020 Eurosystem staff macroeconomic projections, global real GDP (excluding the euro area) will contract by 3.0% this year and expand by 5.8% in 2021, before growing by 3.9% and 3.6% in 2022 and 2023 respectively. Global trade (excluding the euro area) contracted more sharply than real GDP in 2020, but is expected to rebound more strongly in 2021. This primarily reflects the more pronounced procyclicality of trade, especially during economic downturns. These adverse effects are expected to be less severe in the context of the recent resurgence in infections. The balance of risks around the global economic outlook is seen as less negative than previously expected, as, given the news about the viability of several vaccines, it is less likely that the severe scenario will materialise.

ECB Economic Bulletin, Issue 8 / 2020 - Economic and monetary developments	2
Overview

Overall, financial conditions in the euro area have loosened somewhat further since the Governing Council's meeting in September 2020, amid improved risk sentiment on the back of positive announcements about vaccines. Over the review period (10 September to 9 December 2020) the forward curve of the euro overnight index average (EONIA) fluctuated somewhat, but ultimately remained broadly unchanged. This reflects concerns about the accelerated spread of COVID-19in Europe set against positive news about vaccines. The curve continues to be inverted only slightly at the short end. Long-termsovereign bond yields and spreads dropped significantly in the euro area over this period, amid expectations of continued monetary and fiscal support together with a global improvement in risk sentiment, triggered in particular by the news of successful vaccine trials. The prices of risk assets increased accordingly. In foreign exchange markets, the euro depreciated slightly in trade-weightedterms.

Following a sharp contraction in the first half of 2020, euro area real GDP rebounded strongly and rose by 12.5%, quarter on quarter, in the third quarter, although remaining well below pre-pandemic levels. The second wave of the pandemic and the associated intensification of containment measures observed since mid-Octoberare expected to result in a renewed significant decline in activity in the fourth quarter, although to a much lesser extent than observed in the second quarter of this year. Economic developments continue to be uneven across sectors, with activity in the services sector being more adversely affected by the new restrictions on social interaction and mobility than activity in the industrial sector. Although fiscal policy measures are supporting households and firms, consumers remain cautious in the light of the pandemic and its ramifications for employment and earnings. Moreover, weaker corporate balance sheets and uncertainty about the economic outlook are weighing on business investment. Looking ahead, recent advances in the development of COVID-19vaccines allow for greater confidence in the assumption of a gradual resolution of the health crisis. However, it will take time until widespread immunity is achieved, while further resurgences in infections, with challenges to public health and economic prospects, cannot be ruled out. Over the medium term, the recovery of the euro area economy should be supported by favourable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are lifted and uncertainty recedes.

This assessment is broadly reflected in the baseline scenario of the December 2020 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP growth at -7.3%in 2020, 3.9% in 2021, 4.2% in 2022 and 2.1% in 2023. Compared with the September 2020 ECB staff macroeconomic projections, the outlook for economic activity has been revised downwards in the short term but is seen to broadly recover to the level projected in the September baseline scenario over the medium term. Overall, the risks surrounding the euro area growth outlook remain tilted to the downside, but have become less pronounced. While the news about the prospects for vaccine roll-outsis encouraging, downside risks remain related to the implications of the pandemic for economic and financial conditions.

ECB Economic Bulletin, Issue 8 / 2020 - Economic and monetary developments	3
Overview