The eurozone is likely to suffer a sharp increase in unemployment this autumn even as the economic recovery from the coronavirus pandemic takes hold, the European Central Bank has warned.
Top ECB policymakers voiced fears that the labour market was lagging behind the rest of the economy at their monetary policy meeting last month, according to minutes published on Thursday.
ECB chief economist Philip Lane told the meeting that “surveys suggested that employment was lagging output, with actual and expected declines in employment and income, amid precautionary household saving, weighing on consumer spending”, the minutes said.
Europe’s unemployment rate has been relatively stable compared to the sharp rise in US joblessness since the pandemic took hold in the spring, mainly due to the millions of Europeans who were put on to government-subsidised furlough schemes.
But governments face the question of how long they can afford to continue these schemes, as signs emerge that the fallout from the pandemic is feeding through into the labour market. In the three months to June, the number of people employed in the eurozone fell 2.8 per cent, the sharpest decline since records started in 1995 — meaning that 4.5m people dropped out of work.
ECB council members expressed concern last month about the possibility of “cliff effects” if government support programmes are wound down later this year, which could trigger a surge in unemployment. Another risk they identified was that “weak business prospects and high uncertainty were dampening investment”.
Mr Lane told the council that “a resurgence in Covid-19 transmission rates in a number of major economies had led authorities to halt or reverse reopening plans, with a measurable impact on external demand for euro area exports”.
Frederik Ducrozet, strategist at Pictet Wealth Management, said: “What is happening today — with infection levels going up in a lot of countries [and] quarantines being reimposed — that is more worrying by the day and it will be a concern for the governing council at what I expect will be a dovish meeting in September.”
The eurozone economy suffered a historic contraction of 12 per cent in the three months to June, after declining 3.6 per cent in the first quarter. It is expected to rebound sharply in the third quarter, but Mr Lane warned in a blog this month that it “is expected to take a significant amount of time to recover fully from the pandemic shock”.
However council members also outlined several positive scenarios for the eurozone economy, including the possibility that households will start to spend the savings they built up during lockdown, and that the EU’s new €750bn recovery fund will accelerate the rebound.
Some ECB council members argued against spending the whole €1.35tn that the central bank has set aside for emergency asset purchases if the economy continues to recover faster than expected. They said that the bond-buying programme “should be considered a ceiling rather than a target”, the minutes showed.
“The point was made that incoming data had surprised on the upside and some of the downside risks surrounding the outlook prevailing at the time of the governing council’s June monetary policy meeting had receded, increasing the possibility that the envelope might not have to be deployed fully,” the ECB said.
Yet the majority of ECB policymakers agreed that “in the absence of any significant upside surprises in the medium-term inflation outlook” the full amount of assets would be purchased.
Most analysts believe the ECB is more likely to increase the size of the programme than to avoid spending it in full, both because inflation is expected to undershoot its target of just below 2 per cent for several years, and because coronavirus infection numbers have risen again over the summer, which risks creating fresh economic headwinds.
Mr Ducrozet said that floating the possibility of not spending the entire sum “looks like quite a cheap concession to the hawks” on the governing council.
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