Covid-19. Monetary policy in a pandemic emergency (Christine Lagarde, President of the ECB)
Covid-19. Monetary policy in a pandemic emergency. Keynote speech by Christine Lagarde, President of the ECB, at the ECB Forum on Central Banking (today, 11 November 2020).
Let me begin by welcoming all of you to this year’s ECB Forum on Central Banking. Regrettably, we cannot be together in Sintra this time, but I trust that this virtual environment will be no less conducive to challenging ideas and productive debate.
The purpose of this year’s conference is to examine the challenges facing central banking in a shifting world. We will be discussing many of the long-term trends monetary policy has to contend with, including shifting patterns of globalisation, climate change and a lower natural interest rate.
Actually, the largest shift central banks are facing today may well turn out to be the pandemic itself. As John Kenneth Galbraith said, “the enemy of the conventional wisdom is not ideas, but the march of events”. And the events we are seeing today are momentous.
The coronavirus (COVID-19) has produced a highly unusual recession and is likely to give rise to a similarly unsteady recovery. Today I would like to talk about how the ECB’s monetary policy has responded to this unique environment, and how we can best contribute to supporting the economy going forward.
A highly unusual recession
The deliberate shutdown of the economy triggered by the COVID-19 pandemic has produced a highly unusual recession.
Most importantly, it has infiltrated and crippled sectors that are normally less sensitive to the economic cycle. In a regular recession, manufacturing and construction are typically hit harder by the cyclical downturn, while services are more resilient. But during the lockdown in the spring, we saw the reverse.
Compare our experience in the first half of this year with the first six months following the Lehman crash. After Lehman, manufacturing contributed 2.8 percentage points to the recession and services contributed 1.7 percentage points.
But this year, the loss was 9.8 percentage points for services and much less, 3.2 percentage points, for manufacturing.
3 important implications
This has three important implications
First, research finds that the recovery from a services-led recession tends to be slower than from a durable goods-led recession, as services create less pent-up demand than consumer goods. For example, people are unlikely to take twice as many holidays abroad next year to compensate for their lack of foreign travel this year.
Second, as services are more labour-intensive, services-led recessions have an outsized effect on jobs. Five million people in the euro area lost their jobs in the first half of this year.
Of those, almost half worked in retail and wholesale trade, accommodation and food services, and transportation, despite these activities representing less than one-fifth of output. In the six months after Lehman, the worst affected sector – industry – suffered only 900,000 job losses.
And third, these job losses hurt socio-economic groups unevenly. In the first half of 2020, the labour force contracted by almost 7% for people with low skills – who typically also have lower incomes – while it fell by 5.4% for those with medium skills and rose by 3.3% for those with high skills. This is double the loss of low-skilled jobs we saw in the six months after Lehman.