Overview
Economic contraction
In a statement, ECB president Christine Lagarde said the euro area was facing an economic contraction of a magnitude and speed that are unprecedented in peacetime and the ECB was “fully prepared” to increase the size of its recently launched €750 billion pandemic emergency purchase programme and to “adjust its composition, by as much as necessary and for as long as needed”.
Preliminary flash data from Eurostat showed that Eurozone GDP declined by 3.8 per cent in the first quarter, compared to the previous quarter - the largest drop since the series began in 1995 and steeper than the fall seen during the financial crisis.
Fed reiterates its ‘whatever it takes’ pledge
Although the Fed did not announce any new policy changes at its April meeting, chairman Jerome Powell said the Fed was prepared to act “forcefully, proactively and aggressively” if required. The Fed will have to do more in the coming weeks as more than 3.8 million Americans filed for unemployment benefits last week, putting the six-week total at 30 million since the start of the coronavirus lockdown. Although claims are lower, compared to 4.4 million in the previous week, the figures underscored the devastating impact of the pandemic on the US economy.
Indeed, Powell noted that more policy support would likely have to come from both the Fed and Treasury to ensure a robust recovery given the raft of risks facing the economy in the aftermath of the crisis. Among these risks, Powell emphasised uncertainty related to the virus itself, the possibility of damage to productive capacity through long-term unemployment and business insolvencies, as well as the global downturn that may weigh on US economic performance over time.
Given the extreme uncertainty about the outlook, which largely depends on the virus trajectory, we believe any recovery is likely to sluggish and patchy. And with social distancing measures potentially remaining in place for another 12-18 months, the Fed will need to take further action in the coming weeks, including potentially increasing the size of some facilities, changing their terms as well as possibly creating new ones to provide assistance to specific sectors such as housing.
