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For the moment, the outlook has marginally worsened, mainly due to the weakness of services, strongly affected by the epidemic and the blockages, while the manufacturing sector seems to maintain its positions. New ECB staff projections now point to a 7.3% drop in GDP for 2020 (in September they were -8%: the third quarter was expected to be weaker), and an increase of 3.9% ( 5% in September) in 2021, 4.2% (3.2%) in 2022 and 2.1%, respectively, in 2023. An “ambitious and coordinated budgetary policy orientation” will be important to support the recovery.
Price dynamics, however, should give the ECB room to maintain its ultra-expansive stance for a long time. Average annual inflation will increase 0.2% this year (from 0.3% in September), 1% next year (unchanged), 1.1% (from 1.3%) in 2022 and 1.4%, a level certainly not satisfactory by ECB standards, in 2023.
The ECB staff, as in September, also designed two alternative scenarios to the basic one. The most severe scenario, which assumes longer lockdowns and a less favorable development of the epidemic, points to a fall in GDP of 7.6% in 2020 (-10% in previous projections), and an increase limited to 0.4% in 2021 (0.5% in September), to 3% (3.4%) in 2022, while 2023 should register + 2.9%. Meanwhile, average annual inflation should rise from 0.2% (0.3% in September) in 2020 to 0.7% (unchanged compared to previous projections) in 2021 and then move to 0.6% in 2022 (0.7%) and 0.8% in 2023.
The most favorable scenario, with a more rapid containment of the epidemic, foresees an increase in GDP of 6% in 2021 (+ 8.9% in the September projections), from 4.3% in 2022 (3.5%) and 2.1% in 2023 (the same rate as the baseline scenario). Meanwhile, inflation should rise to 1.1% in 2021 (from 1.2% in September), to 1.3% in 2022 (1.8%), to 1.5%, which is still a level unsatisfactory for monetary policy – in 2023.
