ECB upgrades forecasts for Europe's economy

·Senior City Correspondent, Yahoo Finance UK
·2 min read
Women sit at the terrace of a restaurant at Opera Square in Madrid
Women sit at the terrace of a restaurant at Opera Square in Madrid. Spain, the world's second most visited tourist destination, has re-opened borders to vaccinated visitors worldwide as well as non-vaccinated Europeans with a negative antigen test. Photo: Pablo Blazquez Dominguez/Getty Images

Economists at the European Central Bank (ECB) have upgraded their forecasts for Europe's growth this year thanks to a pick-up in the pace of COVID-19 vaccinations across the continent and a relaxation of restrictions.

ECB President Christine Lagarde said the central bank's latest macroeconomic projections now forecast economic expansion of 4.6% in 2021. It marks a significant upgrade from March's projection of 4% growth in GDP.

Economists also upgraded forecasts for euro area growth in 2022. The ECB now expects GDP to grow by 4.7% next year, compared with an earlier expectation of 4.1%. A forecast of 2.1% growth in 2023 was left unchanged.

The ECB's new forecasts are more bullish than both the IMF and OECD.

Read more: ECB holds eurozone interest rate at 0%

Lagarde told a press conference that the upgrades were driven by a pick-up in Europe's COVID-19 vaccination efforts, which were allowing restrictions to be relaxed across the euro area. Early data was showing "signs of a strong rebound starting in the second quarter", Lagarde said, which is expected to accelerate in the second quarter. 

Despite signs of a rebound, the ECB maintained its ultra-loose monetary policy on Thursday. Lagarde said the ECB's governing council was "somewhat more optimistic" but cautioned that "uncertainties remain".

"Overall, we see the risks surrounding the euro area outlook at broadly balanced," she told reporters.

Lagarde said the unlocking of European economies could lead to a faster-than-expected bounce back for GDP and force the ECB to adjust policy sooner than currently expected.

At the same time, the emergence of new COVID-19 variants and the spread of emerging strains, such as the Delta variant, could yet knock the nascent recovery off course.

As a result, the ECB's governing council concluded that an "ample degree of economic accommodation" was still required to support the recovery, Lagarde said.

Eurozone inflation hit the ECB's target of 2% in May and the ECB's macroeconomists have also upgraded their forecasts for price growth over the next two years. Forecasts now see inflation averaging 1.9% in 2021 and 1.5% in 2022. Lagarde said inflation was expected to continue rising in the second half of 2021 – largely due to temporary factors – before falling at the start of next year.

Watch: Will interest rates stay low forever?

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