Weidmann: Trough of the coronavirus crisis likely to be behind us

According to Bundesbank President Jens Weidmann, the German economy has probably moved past the trough of the coronavirus crisis. “The economy is growing again,” Mr Weidmann said during a speech in Frankfurt am Main. At the same time, however, he pointed out that the experts were forecasting only a slow recovery when measured against the sudden slump experienced: “Economic activity is expected to return to its pre-crisis level only towards the end of 2022,” he noted. Nevertheless, he is not anticipating any major long-term harm for the economy’s potential output, albeit based on the assumption that a medical solution to combat the pandemic will be available in the middle of next year. 

Appreciation for the work of the Federal Government

In his speech, Mr Weidmann praised the actions of the Federal Government, citing how it had responded swiftly and comprehensively, thus helping to mitigate the economic fallout of the pandemic. An initial Bundesbank estimate suggests that the economic stimulus package could raise real GDP by 1% this year and ½% next year. Explaining that “the crisis has demonstrated with great clarity how crucial sound public finances are for the ability of states to act”, Mr Weidmann noted that Germany still had fiscal space for additional measures should they prove necessary. 

ECB emergency programme not a permanent measure

Whilst, in terms of tackling the economic fallout of the pandemic, central bankers do not constitute the frontline in Mr Weidmann’s opinion, he acknowledged that, nevertheless, “monetary policy is making a major and important contribution to stabilising the economy in these dire times”. The extreme severity of the current crisis has posed major challenges for the Governing Council of the ECB. Pointing out that there is “a danger that the financial sector might become impaired and that this could aggravate the severe slump in the real economy even further”, he cautioned that this could impede price stability in the medium term. For this reason, monetary policy steps were, in his view, the necessary and correct course of action. However, as on previous occasions, Mr Weidmann also raised the issue of the politico-economic risk associated with government bond purchases. He stressed that the Eurosystem's pandemic emergency purchase programme (PEPP) was geared towards the objective of price stability, temporary in nature and clearly linked to the crisis. “Policymakers must not assume that we would keep the financing costs of governments low forever,” he added. As soon as the price outlook requires a normalisation of monetary policy, the accommodative monetary policy will need to be dialled back. 

The role of central banks in combating climate change

At the same conference, Executive Board member Sabine Mauderer also spoke about the role of central banks in the fight against climate change. Ms Mauderer drew parallels to the coronavirus pandemic, remarking that “the pandemic and climate change are sources of considerable financial risk”. She talked about strengthening resilience and, in that regard, financial markets’ need for adequate data and models to price and manage climate-related risks. In addition, central banks should, she argued, also factor climate-related financial risks into their own risk management.