ECB Economic Bulletin, No. 1 - 2021

The start of vaccination campaigns across the euro area is an important milestone in the resolution of the ongoing health crisis. Nonetheless, the pandemic continues to pose serious risks to public health and to the euro area and global economies. The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity. Activity in the manufacturing sector continues to hold up well, but services sector activity is being severely curbed, albeit to a lesser degree than during the first wave of the pandemic in early 2020. Output is likely to have contracted in the fourth quarter of 2020 and the intensification of the pandemic poses some downside risks to the short-term economic outlook. Inflation remains very low in the context of weak demand and significant slack in labour and product markets. Overall, the incoming data confirm the Governing Council's previous baseline assessment of a pronounced near-term impact of the pandemic on the economy and a protracted weakness in inflation.

In this environment ample monetary stimulus remains essential to preserve favourable financing conditions over the pandemic period for all sectors of the economy. By helping to reduce uncertainty and bolster confidence, this will encourage consumer spending and business investment, underpinning economic activity and safeguarding medium-term price stability. Meanwhile, uncertainty remains high, including relating to the dynamics of the pandemic and the speed of vaccination campaigns. The Governing Council will continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook. The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.

The global economic recovery continued at the end of 2020, amid increasing headwinds from the resurgence of the pandemic. Economic activity in both the manufacturing and services sectors remains robust, although extended lockdowns in the countries more adversely affected by the pandemic increasingly pose downside risks. The recovery in global trade is ongoing, despite some signs of a loss in momentum towards the end of 2020. Global financial conditions remain highly accommodative, with equity markets being buoyed by COVID-19 vaccine-related developments, expansive fiscal policies and lower uncertainty regarding future trade relations between the European Union and the United Kingdom.

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