Lockdowns Menacing Europe Test ECB Stimulus Wind-Down Timeline

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The return of lockdowns to stem Europe’s latest wave of Covid-19 cases risks sapping the economic recovery and calling into question the timetable for the European Central Bank’s wind down of emergency stimulus.

Austria on Friday became the first country beyond the continent’s less-vaccinated east to reimpose widespread restrictions after curbs on people who haven’t been jabbed failed to halt soaring infections. Parts of German also closed non-essential businesses, while the Netherlands has already ordered shops and bars to close early.

The bright spot is further west, where people in France, Spain and Portugal have embraced inoculation far more enthusiastically, resulting in manageable caseloads.

While Europe can lean on its experience during the pandemic’s earlier phases to help mitigate the economic pain, some kind of hit is inevitable. A significant blow to the euro-area economy would offer ECB policy makers ammunition to repel any attempts to dial back ultra-loose monetary policy.

‘Everybody’s Holding Back’

Data show economies were less bruised by later lockdowns than they were by the initial closures early last year. But as well as restrictions on commerce and remote-work mandates, the persistent fear of getting sick could limit people’s movements.

“Everybody’s holding back -- even the vaccinated,” said Commerzbank AG chief economist Joerg Kraemer, who sees Germany’s economy -- Europe’s biggest -- stagnating or even contracting during the winter. “I don’t expect it’ll be as bad as during the last lockdown, but I do expect it to leave a mark.”

The extent of the damage will hinge on the severity of the measures.

“Everything depends on how strict the restrictions will get and whether it will spread to other countries,” said Felix Huefner, an economist at UBS in Frankfurt. “The benchmark is what happened last winter, the full lockdown. Growth didn’t slow as strongly as in 2020.”

With supply-chain disruptions holding back the manufacturing industry, Germany’s finance ministry is already warning that “only a slight increase” in gross domestic product should be expected in the final quarter of 2021.

If Germany follows Austria’s example, “20-day lockdowns imposed in those two countries alone could cut euro-area growth to 0.9% from 1.1% in our baseline forecast” for the final three months of the year, according to Jamie Rush and Maeva Cousin of Bloomberg Economics. “If similar restrictions are adopted by other major euro-area economies, growth in the region might slow to 0.4%.”

‘Crisis Isn’t Over’

The tighter virus restrictions will be an unavoidable topic of discussion when the ECB meets in mid-December to determine the future of its quantitative easing programs.

Policy makers are set to decide whether to allow their pandemic bond-buying plan known as PEPP to conclude as scheduled at the end of March and, if so, whether to adjust their regular APP program, currently running at 20 billion euros ($23 billion) a month.

Marchel Alexandrovich, an economist at Jefferies in London, says there won’t necessarily be a “massively bigger stimulative package” on the back of the latest lockdown developments. But more dovish officials may find it easier to convey that “the crisis isn’t over” and bridge “differences and divides on the Governing Council.”

“They’re going to try to keep as much of the status quo as possible,” he said. “PEPP is coming to an end, but they’re going to dress up QE as something else. Whether it’s an increase of the APP or whether they come up with a new program, we’ll find out.”

Bloomberg Economics agrees that the worsening virus situation will strengthen the arguments of policy makers seeking to play down the current bout of elevated inflation, which hit its highest level since 2008 in the euro region last month. 

The resulting economic slowdown “will offer doves at the ECB some additional rationale for maintaining stimulus while looking through the temporary surge in inflation,” Rush and Cousin said.

©2021 Bloomberg L.P.