European Central Bank Ramps Up Stimulus Program Beyond $1.5 Trillion

WSJ
(ĐTTCO) - Stimulus efforts are now in line with the Fed’s, reflecting a policy turnaround in Europe to counter sharp downturn

Christine Lagarde, president of the European Central Bank, said the eurozone is experiencing an unprecedented contraction. PHOTO: DANIEL ROLAND/AGENCE FRANCE-PRESSE/GETTY IMAGES

Christine Lagarde, president of the European Central Bank, said the eurozone is experiencing an unprecedented contraction. PHOTO: DANIEL ROLAND/AGENCE FRANCE-PRESSE/GETTY IMAGES

The European Central Bank scaled up its bond-buying program to €1.35 trillion ($1.52 trillion) Thursday in a bold move that puts the ECB’s stimulus effort in line with that of the Federal Reserve, while U.S. unemployment and trade data pointed to a rocky recovery from the pandemic shutdowns that crippled the global economy.

Investors cheered the ECB’s decision, pushing the euro to its highest level against the dollar since March and fanning a recent rally in eurozone equity and bond markets. The move eases pressure on the region’s embattled governments and underscores a recent shift in Europe, where policy makers initially lagged behind the U.S. in the amount of firepower they threw at the crisis but have over the past week unveiled a series of bold stimulus moves.

“The euro area economy is experiencing an unprecedented contraction,” ECB President Christine Lagarde said at a news conference. Economic output in the region is likely to shrink by 8.7% this year before rebounding by 5.2% next year, said Ms. Lagarde, who didn’t rule out an even deeper downturn.

That contraction is larger than what is expected for the U.S., where the economy is forecast to shrink by 6.6% this year and grow by 5.0% in 2021, according to The Wall Street Journal’s May economist survey.

On Thursday, new figures showed that the number of workers applying for and receiving unemployment benefits in the U.S. was historically high but eased at the end of May, indicating that the U.S. labor market has weathered the worst of the economic fallout from the coronavirus pandemic.

The ranks of Americans drawing on unemployment benefits ticked up to 21.5 million in the week ended May 23, though the pace of increase significantly slowed from earlier in the crisis, the Labor Department said Thursday. So-called continuing claims are released with a one-week lag and appeared to hit a peak in early May.

Meanwhile, U.S. exports and imports both posted their largest monthly decreases on record amid coronavirus-related shutdowns around the world.

Imports fell 13.7% in April from March, and exports dropped 20.5%, the largest declines since record-keeping began in 1992, the Commerce Department reported Thursday. The trade deficit expanded 16.7% to a seasonally adjusted $49.41 billion.

“Beyond the fact that we’re seeing a significant widening of the trade deficit, what really strikes me is the pace at which trade flows are declining,” with imports and exports down about a quarter since the coronavirus outbreak, said Gregory Daco, chief U.S. economist at Oxford Economics.

The Fed’s rate-setting committee next week will release a policy statement and its first set of economic projections since December. Economists aren’t looking for a major policy shift, but new forecasts could show officials expect to hold rates near zero over at least the next 2½ years.

In Europe, the ECB decision pushed the euro 0.3% higher against the dollar to its highest level since mid-March and yields on Southern European debt fell, as investors saw the expansion as a sign of support for the eurozone.

“The ECB is very well known to be behind the curve, only acting at five minutes to midnight, but now they are ahead of the curve,” said Alberto Gallo, a fund manager at Algebris Investments in London.

The ECB said it would buy up to €1.35 trillion of eurozone government and corporate debt through June 2021, expanding and extending an existing €750 billion bond-buying program. In an unexpected move, the ECB said it would roll over maturing bonds bought under its new bond-buying program, known as the Pandemic Emergency Purchase Program or PEPP, through the end of 2022. The bank left its key interest rate unchanged at minus 0.5%.

The size and scope of the economic downturn sparked by the coronavirus pandemic have raised concerns that even stronger members such as Germany won’t be spared and pressure on weaker members such as Spain and Italy could be so great as to threaten the currency union itself. Squabbling among member states and tensions within the ECB meant the bloc was slow to react to an economic collapse that could be the worst since World War II.

But recent decisions have been more encouraging.

The European Union last week set out a $2 trillion coronavirus response plan that, if approved, would mark an unprecedented deepening of the bloc’s economic union. Meanwhile, Germany on Wednesday unveiled a rare €130 billion package of tax cuts and budgetary handouts, aiming to kick-start consumer and business spending in Europe’s largest economy.

Still, analysts suggested even those forceful measures might not be enough given the depth of the downturn. The ECB will likely need to scale up its bond purchases by another €500 billion as soon as September if it is to continue buying eurozone debt at its current pace through the middle of next year, said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

The borrowing costs of Italy and other Southern European countries have jumped in recent weeks as investors worried about the ability of highly indebted governments to handle the rising costs of the crisis. The ECB’s bond-buying helps keep a lid on those costs.

Major central banks such as the Fed and the Bank of Japan have pledged to buy debt in almost unlimited quantities to support a new wave of government spending. Unlike those central banks, the ECB is legally prohibited from financing governments.

The Fed has pumped around $3 trillion of liquidity into the U.S. financial system since March. Accounting for Thursday’s expansion by the ECB and the more than $1 trillion in cheap loans that it is providing across the region, the two stimulus efforts are comparable in scale.

The ECB’s latest move should help to absorb much of the €1 trillion or more of additional debt that eurozone governments are expected to issue this year as they battle the coronavirus pandemic.

Parts of the region have been hit harder by the pandemic, especially Italy and Spain. Those economies contracted around 20% on an annual basis in the first three months of the year, compared with a 9% contraction in Germany. Italy’s government debt is expected to jump to 156% this year, compared with 69% for Germany, according to the International Monetary Fund.

While there are tentative signs that the region’s downturn may be bottoming out, the recovery “has so far been tepid compared with the speed at which the indicators plummeted in the preceding two months,” Ms. Lagarde warned.

WSJ

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