European Central Bank president Christine Lagarde said the lender hopes 2021 remains the year of recovery, with the first phase of the rebound loaded with uncertainty as the vaccination drive gets underway and the second centred on countries opening up.
Speaking at the World Economic Forum, Ms Lagarde said growth in the fourth quarter of 2020 will be negative, which impacts the first quarter of this year and means that fiscal policy must "play a dominant role" during the first phase of the recovery.
“Phase one is clearly one that is still tied with a very high level of uncertainty, as vaccinations are produced, supplied and distributed [and] as we see more lockdown measures, sometimes more stringent, as the variants are also now being rolled out in our societies,” Ms Lagarde told delegates attending a session on restoring economic growth on Monday.
“So phase one … is still about crossing that bridge to the recovery but where the journey seems to be a little bit delayed."
The European Central Bank kept interest rates and its stimulus package unchanged last week, when Ms Lagarde held the pandemic bond-buying programme at €1.85 trillion ($2.24tn), following a €500bn boost last month.
Ms Lagarde said the ECB’s goal is to continue supporting all sectors of the economy, and "make sure that financing conditions remain favourable”.
Once the global economy can “cross the bridge” from phase one to phase two, then “we are on the other side”, where the economy is reopening and “then the challenges are different” because it is a “new economy”, said Ms Lagarde.
Positive developments to look forward to in phase two include the fact that many advanced economies, particularly in Europe, have leapfrogged by about seven years in terms of digitalisation, said Ms Lagarde.
Other positives centre around the way people work, with it very likely that about 20 per cent of the time worked in offices pre-pandemic will be undertaken from home.
She also pointed to how technological changes are helping pandemic-affected businesses, with venture capital spent on sectors particularly affected by social distancing up 56 per cent since December 2019.
Looking ahead, however, she stressed that climate change is an issue that must be dealt with “as a matter of priority”, with major countries already focused on that fight.
She said the post-pandemic era will also present a number of challenges, including unemployment, which data-wise does “not appear that bad”.
Eurozone unemployment fell slightly in November for the second month in a row, with the jobless rate dipping to 8.3 per cent of the workforce from 8.4 per cent in October.
The figure for those out of work decreased by 172,000 in November, according to Eurostat, as the declining jobless rate followed a similar pattern to October, however, the positive data may mask the real picture.
“That is really hiding actual numbers that are a lot worse, because a lot of people are being discouraged from ... looking for jobs because they know that they will not find those jobs,” said Ms Lagarde.
Other challenges going forward include the higher number of low-skilled workers that have been affected by the crisis, compared to high-skilled workers; the fact that lockdowns are affecting all companies; and falling investment in innovation.
“Typically a recession, it plays as a cleansing element,” she said. “The pandemic is actually hitting productive and non-productive operations and that is also going to have an impact in terms of scarring going forward,” she said.
While green development and the financing and education that goes with it will become a focus as governments look towards the new economy, at the same time authorities will have to “stay the course” and continue support to ensure they can move from phase one of the recovery to phase two, she said.