FRANKFURT – Just a few months ago, everyone was worried about inflation – except for the European Central Bank. Today everyone fears that the invasion of Ukraine will severely hit European economic growth – except for the ECB.
What causes the ECB to play the optimist again and threatens to catch up?
“I still wonder what will happen when the ECB learns that the war in Ukraine will not only drive up inflation, but will also weigh heavily on growth,” says ING economist Carsten Brzeski joked on Twitter following the latest release of ECB forecasts.
Before the Russian attack on February 24, the ECB expected the eurozone would grow 4.2 percent this year and 2.9 percent next year. This growth outlook was solid enough that policymakers began shifting gears in December to focus on fighting inflation.
ECB forecasts now include three different growth scenarios to reflect the exceptional uncertainty. The baseline scenario calls for GDP growth of 3.7 percent this year and 2.8 percent in 2023. An unfavorable scenario sees growth of a more muted 2.5 percent this year and 2.7 percent the next, while an even worse scenario puts growth at 2.3 percent for both years.
But outside the central bank, analysts paint a much bleaker picture. The forecasts of the top banks are usually closer to the ECB’s unfavorable or even severe scenario.
Barclays, for example, sees GDP at 2.4 percent this year and 2.1 percent next year, while Goldman Sachs put it up a notch, at 2.5 percent and 2.2 percent, respectively. Forecasts from Natixis, Morgan Stanley and Société Générale are more optimistic, expecting growth of around 3 percent this year, but that’s still well below the ECB’s baseline estimate.
As for JP Morgan, “we did a significantly larger growth revision and our forecast is now well below that of the ECB staffers,” said economist Greg Fuzesi, noting that their estimate had not yet factored in the latest gas price levels.
Part of this discrepancy can be traced back to the February 28th ECB forecast cut-off date. ECB Governing Council member Ignazio Visco hinted at this when he told a conference last week that “there is reason to believe” that the ECB’s latest projections are “already out of date”.
However, ECB President Christine Lagarde continues to point to forecasts without implying that a significant revision is on the horizon.
“I believe that at least based on the scenarios we have developed and given the strong economic recovery that we are in in the current cycle, we currently do not see any elements of stagnation,” Lagarde said on Monday. Even under the negative scenario, which assumes second-round effects on inflation and a boycott of Russian gas and oil, growth will still be 2.3 percent, she noted.
Look on the bright side of life
Barclays economist Silvia Ardagna attributes some of these differences to the fact that the ECB forecasts were finalized when “it was not clear whether Russia’s aggression was a short-lived attack or a protracted war, [and] It was not clear whether sanctions would be increased or decreased.”
For his part, Société Générale economist Anatoli Annenkov attributes the difference between his bank’s forecast and the ECB’s baseline scenario largely to differing oil price assumptions. But he is surprised at how small the difference is between the ECB’s worst and worst cases, calling it “quite revealing”.
“Even under the severe scenario of a massive spike in inflation, the economy is growing beyond potential,” he stressed. In other words, the ECB could overstate growth.
The severe scenario for 2.3 percent also has former ECB executive board member Peter Praet scratching his head, as this scenario does not assume a significant increase in fiscal spending to cushion headwinds.
Praet, who was responsible for preparing staff forecasts while he was chief economist at the central bank, noted that
Another explanation is more political: the ECB remains focused on its mandate to control inflation and doesn’t want to cloud its message.
“The ECB feels it is necessary to sound more positive on growth as it has a real inflation problem,” Annenkov suggested. “They must stick to plans to withdraw stimulus to anchor inflation expectations while hoping to avoid a recession.”
Meanwhile, behind closed doors, other European officials are seeing darker results.
The European Systemic Risk Board, chaired by Lagarde, warned in a presentation to EU capitals in Brussels last Wednesday that the impact of the war “could be much greater than currently anticipated” due to supply chain disruptions and higher prices for households and businesses.
Such a scenario would make the ECB’s task of tightening monetary policy to combat rampant inflation even more difficult. The central bank currently sees average eurozone inflation this year at 5.1 percent – a forecast most analysts see as overly friendly.
In the short term, odds are that the economic hit will be “huge and likely much larger than most are currently forecasting,” warned UniCredit economic adviser Erik Nielsen.
He is particularly concerned about the longer-term effects.
“The war will shake the global economy much more than the pandemic,” he said. “The fire won’t come through the front door, but it will burn longer.
“And there is a real risk that things will get worse if China is forced to take sides or the war escalates,” he added.
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https://www.politico.eu/article/ecb-bullish-tone-other-forecast-darken/?utm_source=RSS_Feed&utm_medium=RSS&utm_campaign=RSS_Syndication ECB maintains bullish tone as other forecasts darken – POLITICO