KUWAIT: JUNE 9, 2020
EUROPE TAKES FRESH POLICY ACTION
Activity across Europe also shows signs of stirring as lockdowns are eased, with the Eurozone composite PMI rebounding from an astonishing low of 13.6 in April to an improved but still weak 31.9 in May. There has also been good news so far on the unemployment rate, which – despite GDP plunging 3.8% q/q in Q1 and a projected -10% or more in Q2 – ticked up only fractionally in April to 7.3% from a pre-crisis 7.2% in February. In Italy it even fell, though this merely reflected a large number of people leaving the workforce. One explanation for the resilient labor market is the effectiveness of wage-subsidy programs across the region, which have allowed firms to sustain their workforces despite plunging revenues. However the risk is that if demand for the same jobs does not return, the support money will have been misallocated.
There are signs that economic policy is becoming more active. The ECB announced in June that it would expand the size of its €750 billion PEPP QE program to €1.35 trillion and extend its purchases until at least June 2021 (previously end-2020) – a move aimed at reviving growth and keeping borrowing costs especially for vulnerable countries such as Italy and Spain low. The bank justified this by slashing both its growth and inflation projections: regional output is now seen contracting 8.7% this year (+0.8% in March) and not recovering to pre-Covid levels until 2023. Inflation will plunge to just 0.3% this year and 0.8% in 2021, well below the near-2% target. The policy loosening suggests the ECB is undeterred following a ruling by the German constitutional court in May that the bank may have overstepped its mandate with an earlier (but still active) QE program, which if not adequately rebutted could ultimately lead to a fracturing of support for the single currency.