Europe upbeat over growth, ‘concerned’ about inflation

ECB intensifies focus on climate change

BRUSSELS, July 8, (AP): European Union economies are set to rebound by their highest rates in decades as coronavirus restrictions ease, but still face risks posed by COVID-19 variants and concerns over inflation, the EU’s executive branch said Wednesday.

The European Commission’s 2021 summer forecasts predict that the economies in the 27-nation EU, and among the 19 countries using the euro single currency, are expected to expand by 4.8% this year, around half a percentage point higher than foreseen under the previous forecast.

Real gross domestic product is expected to return to its pre-coronavirus crisis level in the last quarter of this year. Growth in 2022 is predicted to hit 4.5%.

The commission puts its increasing optimism down to the fact that economic activity early this year has exceeded expectations, and due to the impact of coronavirus vaccine strategy, which has led to falling numbers of new infections and hospital admissions.

“The EU economy is set to see its fastest growth in decades this year, fueled by strong demand both at home and globally and a swifterthan-expected reopening of services sectors since the spring,” Economy Commissioner Paolo Gentiloni said.

But he warned that the EU “must redouble our vaccination efforts, building on the impressive progress made in recent months: the spread of the delta variant is a stark reminder that we have not yet emerged from the shadow of the pandemic.”

The commission said that the economic risks depend on how households and companies respond to any new tightening of restrictions to stop the spread of variants. It also warned that inflation could rise if supply restrictions last and price pressures are passed on to consumer prices.

For now, inflation in the EU is forecast to average 2.2% this year, up 0.3 percentage points over predictions in May, and 1.6% in 2022. It’s forecast to average 1.9% in the euro area in 2021, up 0.2 percentage points, and 1.4% next year.

Meanwhile, the European Central Bank has adopted a new approach to managing the economy that would tolerate transitory periods of consumer inflation moderately above its 2% goal - and take greater account of climate change in its forecasting and stimulus programs.

The changes announced Thursday for the 19 countries that use the euro are the first review of the bank’s overall strategy since since 2003 and follows years in which inflation ran below the bank’s goal for extended periods of time.

A key aspect is replacing the bank’s previous inflation goal of “below but close to” 2% annual inflation. The new target is described as 2%, but “symmetric.” That means it would allow a “transitory period” of above-target inflation. In theory, that would allow the bank to maintain low interest rates and stimulus programs such as bond purchases with newly created money for a longer period of time.

The decision moves the ECB in the same direction as the U.S. Federal Reserve, which moved to average inflation targeting last year that could allow inflation moderately above 2% for some time.

The ECB goal is not as aggressive as the Fed’s, since it would “not actively aim to run inflation above target to make up for previous shortfall,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“It would have no immediate implications for monetary policy, but in the longer run may imply policy would be looser for longer,” Kenningham said in an emailed research note.

The bank said that counting the rise in house prices would better represent inflation as it’s relevant to households. Including owner-occupied housing in the EU’s inflation index would take years, however; therefore the bank said it plans to use initial estimates of housing costs to supplement its inflation measures.

The bank said it would do more to take the impact of climate change into its monetary policy, saying that global warming could have “profound implications” for price stability. It said it would expand its economic models and statistics to better assess the effect that climate change could have on the economy.

When purchasing bonds, the bank said it could take into consideration whether the companies issuing those bonds were compliant with EU legislation implementing the 2015 Paris climate change accords. Buying corporate and government bonds is a tool the bank uses to drive down borrowing costs for businesses, households and government budgets.

The bank’s mandate established in the basic European Union treaty is to pursue price stability. Once that is achieved, it can pursue other goals consistent with the EU’s economic policies.

The bank said it would apply the new strategy starting with its next meeting on July 22.