The Ukraine war on the euro area’s border is hampering the pandemic rebound, with the International Monetary Fund slashing its 2022 growth forecast for the currency bloc to just 2.8%. Highlighting the malaise, German factory orders plunged in March, falling more than anticipated after Russia’s invasion darkened the prospects for Europe’s top economy.
In the starkest warning yet from the ECB of the damage being wrought by the war in Ukraine, Panetta told Italy’s La Stampa newspaper that the region’s economy is “de facto stagnating.”
“This makes the choices facing the ECB more complicated, as a monetary tightening aimed at containing inflation would end up hampering growth that is already weakening,” he said.
European Central Bank Executive Board member Fabio Panetta said economic expansion has almost ground to a halt in the euro area and faces further “high costs” as policy makers battle record inflation.
Panetta’s comments strike a far more cautious note than some of his hawkish colleagues at the ECB, who’ve raised the possibility of lifting interest rates from all-time lows starting in July. Bigger-than-normal hikes came this week alone in the U.S., India and Australia.
The Italian official, who’s been on the Executive Board since 2020, said it would be “imprudent” to act without first seeing gross domestic product figures for the second quarter — signaling he favors waiting longer to make a decision.
The ECB’s next rate meetings are on June 8-9 and July 20-21. While second-quarter GDP data aren’t officially published until July 29, indicators on how the economy is doing are available earlier.
Speaking later Thursday, Bank of Portugal chief Mario Centeno said second-quarter numbers will be “very important,” calling stagnation a “possible scenario.”
Asked about rate hikes, Panetta said “it does not make much of a difference whether it is two or three months earlier or later.” Under current circumstances, however, “negative rates and net asset purchases may no longer be necessary.”
In a speech Thursday, ECB Chief Economist Philip Lane called the timeline to normalize monetary policy “intrinsically uncertain.”
Panetta said inflation is being fanned by international factors that monetary policy can only address in a limited manner. That means the ECB cannot tame inflation on our own without causing high costs for the economy.
Factories are signaling distress from inflation that’s almost four times the 2% target and a fresh supply squeeze aggravated by Covid-19 lockdowns in China. Meanwhile, any catch-up in European consumption as virus restrictions are eased may fade as spending power is eroded.
Despite officials dismissing talk of stagflation and Lane saying Friday that there’s “still a lot of momentum,” first-quarter growth only inched up 0.2% from the previous three months.
