Europe’s recovery will be ‘restrained’, Christine Lagarde warns

European Central Bank president Christine Lagarde has warned that the economic recovery from the hit caused by coronavirus will be “restrained” as households save instead of spending while some airlines and hotels suffer “irremediable” damage.

Figures released by the ECB on Friday showed that household savings had soared since the pandemic hit Europe, rising by €214bn between February and May to reach an all-time high of €7.3tn.

“The recovery is going to be a complicated matter, I would characterise it as sequential and restrained,” Ms Lagarde told an online conference on Friday. “The amount of household savings we have seen in the euro area — these savings were partly forced and they will go back up now that shops are open, but there is also some precautionary saving.”

“We are not going to return to the ex-ante status quo,” said Ms Lagarde, adding: “We will not travel as much, so the airline industries, the hospitality industries, the entertainment industries are going to come out of this recovery process in a different shape and some will probably be hurt irremediably.”

Ms Lagarde said household savings in the eurozone increased 136 per cent year on year in March and April when pandemic-related lockdowns were at their height in Europe.

Predicting that global trade was likely to be “significantly reduced” by the fallout from the pandemic, Ms Lagarde said the economic recovery would also be “incomplete” because of lower productivity caused by less efficient supply chains.

This month the ECB expanded its emergency bond purchase programme by €600bn to €1.35tn and Ms Lagarde said it had “used all policy levers” to ensure financing costs stayed low for households, companies and governments and that banks continued to lend.

The ECB said lending had continued to rise sharply since the pandemic started in March, and credit to euro area residents increased by €263bn, or 6.2 per cent, in May. Lending to eurozone governments was up 9.8 per cent, while private sector lending rose 4.9 per cent.

Frederik Ducrozet, strategist at Pictet Wealth Management, said: “The rise in euro area bank loans to the corporate sector over the past three months was the strongest ever since the euro was created.”

Warning that EU leaders were unlikely to reach agreement on the proposed €750bn recovery fund to support countries hit hardest by the pandemic at their summit on July 17, Ms Lagarde said she was confident a deal would eventually be struck. She praised fiscal policymakers for their swift response to the crisis and said that “for once, monetary policy and fiscal policy are working hand-in-hand”.

Ms Lagarde said debt levels were going to “massively increase” both for countries and companies, adding that it would “have to be repaid”. However, she added the “maturities are going to be in a different category to what we have been used to”, suggesting that loans could be taken out for longer periods — such as Austria’s new 100-year bond.

Predicting that the crisis would have the biggest impact on the most vulnerable nations and members of society — such as the young and women — she said many young people “work in restaurants and hospitality on short-term contracts [and] those jobs will go first”. 

New data on Friday showed that Europe’s largest economies continued to recover in May from their sharpest contractions on record after lockdown restrictions were loosened and activities resumed. In France, consumer confidence rebounded more than expected in June, gaining 4 points to 97, close to its long-term average of 100, the statistical office Insee said.

Meanwhile, sales at non-financial businesses in Germany rose 7.5 per cent in May compared with the previous month, the Federal Statistical Office said. The index is still 15 per cent below its pre-pandemic level after falling by a record amount in April.

In Spain, the volume of retail sales jumped 19.3 per cent in May compared with the previous month, reflecting the reopening of stores. In Italy the national indicator of business confidence rose to 65.4 in June, from 52.7 the previous month, but it remained well below the pre-pandemic level of 100.