Philip R. Lane’s Assessment of Economic Developments Since December 2020

In this interview, Philip R. Lane, a Member of the Executive Board of the ECB, provides his assessment of economic developments since the December projections. He notes several favorable supply shocks, including a strong decline in energy prices, the easing of bottlenecks, the reopening of China, and the improvement in the labor market. He argues that these factors will likely lead to a decrease in inflationary pressures, although this will depend on the aggregation of the staff’s new projections.

Overview of Supply Shocks

Lane begins by discussing the supply shocks since the December projections. First, he notes that energy prices, particularly for gas, have declined, reversing the stagflationary shock of the previous year. This should lead to an increase in GDP and a decrease in inflation. He also notes that the bottlenecks in the car industry have begun to ease, which is a significant factor for the European economy. Additionally, the reopening of China has created a favorable supply shock, as Chinese firms are now back competing on the global market, boosting global demand for commodities and foreign demand for the euro area.

Overview of Demand Shocks

Lane then discusses the demand shocks that have occurred since the December projections. First, he notes that the labor market has improved, with ongoing increases in employment and decreasing risk of job loss. He also notes that the financial support in the last months of 2020 helped many households preserve their income and consumption. Finally, he notes that monetary policy is working, as evidenced by increases in the yield curve, bank lending rates, house prices, and a tightening of credit conditions.

Near-Term vs. Long-Term Outlook

Lane then discusses the near-term versus the long-term outlook. He notes that the improvement in the energy price situation will, in the near term, lower inflation and boost GDP. However, he notes that the tightening of monetary policy has been significantly more than what was baked into the December forecast, which must be factored into the new forecasts. He also notes that the war against Ukraine should not be interpreted simply as an energy crisis, as it has raised many other issues, such as the future of trade and geopolitics.

Related Facts

• The war against Ukraine has led to a drop in consumer and investor confidence.
• The reopening of China is boosting global demand for commodities and foreign demand for the euro area.
• The labor market is improving, with ongoing increases in employment and decreasing risk of job loss.
• Monetary policy is working, as evidenced by increases in the yield curve, bank lending rates, house prices, and a tightening of credit conditions.

Key Takeaway

The supply shocks since the December projections have been favorable, including a strong decline in energy prices, the easing of bottlenecks, the reopening of China, and the improvement in the labor market. Additionally, fiscal support and monetary policy are both working. However, the tightening of monetary policy has been significantly more than what was baked into the December forecast, which must be factored into the new projections.

Conclusion

Overall, the supply shocks since the December projections have been favorable and should lead to a decrease in inflationary pressures. However, this will depend on aggregating the staff’s new projections. The war against Ukraine should not be interpreted simply as an energy crisis, as it has raised many other issues, such as the future of trade and geopolitics. Fiscal support and monetary policy are both working, although the tightening of monetary policy must be factored into the new projections.