ECB’s Lagarde says ‘probably passed lowest point’ of economic crisis

European Central Bank Chief Christine Lagarde. (AFP)
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Updated 27 June 2020

ECB’s Lagarde says ‘probably passed lowest point’ of economic crisis

FRANKFURT: The worst of the economic crisis unleashed by the coronavirus is likely over, European Central Bank Chief Christine Lagarde said on Friday, warning however that the new normal will look different from what was before.

“We probably have passed the lowest point. I say that with some trepidation because of course there could be a severe second wave if we learn anything from the Spanish flu,” she told an online conference. “We are not going to return to the status quo. It’s going to be different. The recovery is going to be incomplete and transformational.”

The hardest hit industries — such as airlines, hospitality and entertainment — will emerge from the crisis “in a different shape,” while new sectors may arise.

The recovery would also be at different paces. “It’s going to be a continent at a time,” warned Lagarde.

The International Monetary Fund predicted in its latest forecasts on Wednesday that the world economy would contract by 4.9 percent in 2020, before growing 5.4 percent next year.

The contraction is most dramatic for the eurozone, which will see the economy shrink 10.2 percent.

China in contrast, could yet post growth of 1 percent for 2020, according to the IMF.

Former IMF chief Lagarde said central banks had been playing their part to mitigate the damage. “The central banks I think have responded massively, diligently to the challenge and we will continue to do so,” she said. “Call it whatever it takes, call it using all the levers . . . The mandate is the same — our mandate is price stability.”

But while central banks have in the past complained about being asked to do the heavy lifting while governments keep their coffers tightly shut, Lagarde said this time “what is very special is that for once, monetary policies and fiscal polices worked hand in hand.”

In Europe, Germany has taken the lead in digging deep into its treasury, unleashing over a trillion euros worth of aid to shore up the economy. German Chancellor Angela Merkel and France’s President Emmanuel Macron have also sketched out the backbone of $840 million fund proposed by EU chief Ursula von der Leyen to bolster the bloc’s economy.

The move blasts through Germany’s traditional opposition to “subsidise” other member state outgoings, as it would include grants — with no repayment obligation — to those hardest hit by the crisis.

Analysts urge Canada to focus on boosting the economy

Updated 06 July 2020

Analysts urge Canada to focus on boosting the economy

  • Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time

TORONTO: Canada should focus on boosting economic growth after getting pummeled by the COVID-19 crisis, analysts say, even as concerns about the sustainability of its debt are growing, with Fitch downgrading the nation’s rating just over a week ago.

Canadian Finance Minister Bill Morneau will deliver a “fiscal snapshot” on Wednesday that will outline the current balance sheet and may give an idea of the money the government is setting aside for the future.

As the economy recovers, some fiscal support measures, which are expected to boost the budget deficit sharply, could be wound down and replaced by incentives meant to get people back to work and measures to boost economic growth, economists said.

“The only solution to these large deficits is growth, so we need a transition to a pro-growth agenda,” said Craig Wright, chief economist at Royal Bank of Canada. The IMF expects Canada’s economy to contract by 8.4 percent this year. Ottawa is already rolling out more than C$150 billion in direct economic aid, including payments to workers impacted by COVID-19.

Further stimulus measures could include a green growth strategy, as well as spending on infrastructure, including smart infrastructure, economists said. Smart infrastructure makes use of digital technology.

“We have to make sure that government spending is calibrated to the economy of the future rather than the economy of the past,” Wright said.

Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time, citing the billions of dollars in emergency aid Ottawa has spent to help bridge the downturn caused by COVID-19 shutdowns.

Standard & Poor’s, Moody’s and DBRS still give Canadian debt the highest rating. At DBRS, Michael Heydt, the lead sovereign analyst on Canada, says his concern is about potential structural damage to the economy if the slowdown lingers too long.

Fiscal policymakers “need to be confident that there is a recovery underway before they start talking about (debt) consolidation,” Heydt said.

Fitch expects Canada’s total government debt will rise to 115.1 percent of GDP in 2020 from 88.3 percent in 2019.

Royce Mendes, a senior economist at CIBC Capital Markets, said the economy still needs more support.

“Turning too quickly toward austerity would be a clear mistake,” he said.