The ECB sees a recession scenario unlikely

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The European economy appears to be showing some signs of weakening and everyone is afraid of falling into a recession. However, Mario Draghi, the president of the European Central Bank (ECB), after assessing the risks, believes that the possibility of falling back into a recession is quite low. Despite everything, the drop in growth figures and the collapse of global trade continue to be worrisome. Is Draghi right or is there really a real threat of recession?

The consequences of a recession are feared by all, especially after the devastating effects of the last great economic crisis. The world economy is beginning to show signs of weakening growth and the rise of protectionism has caused a significant drop in international trade. Despite everything, Mario Draghi insists on considering the recession as an unlikely scenario.

Anticipating a recession is not easy and our colleague José Francisco López already warned in his article "Can crises and recessions be predicted?" Forecasting is not an easy task, since economics is a social science and does not result in irrefutable truths. Furthermore, many of the forecasts are based on statistical calculations that are not always fulfilled. Nor should we forget the influence of the human factor in the economy, which can jeopardize all kinds of economic forecasts. Even the most reputable organizations are wrong in their predictions, which is why Mario Draghi's forecasts should be valued in fair measure.

A slowing economic environment

As we previously explained, one of the elements that seem to cause concern is the fall in economic growth data. In his article “Economic expansion weakens, growth slows down”, Francisco Coll illustrated how the expansionary cycle weakens, as the United States will go from growing from 3.5% registered in 2018 to 2.5% in 2019 and 2 % in 2020. Another great economic power such as China, whose growth figures were astronomical, will see its GDP increase by less than 6% in 2019, falling below the 2018 data. The European economy will not get rid of this either. trend, as it will advance to figures below 1.5%. It should not be forgotten that, recently, Germany, the great European economic power, has narrowly avoided the technical recession.

Thus, there are those who consider that the fall of the cycle of economic expansion may be the prelude to a recession. However, in Europe, there are data on domestic demand that seem to ward off the specter of recession. The favorable conditions to obtain financing, the increase in wages or an unemployment rate in the euro zone of 7.8% (the lowest since 2008) are the causes that maintain the pull in domestic demand.

Attentive to the monetary policy of the ECB

Given the current outlook, with a moderation in growth figures, Mario Draghi is committed to continuing with the current ECB monetary policy, waiting until spring 2020 to raise interest rates. This is because the rise in interest rates in a slowdown scenario could make it even more pronounced.

Another measure aimed at maintaining the flow of economic activity is the ECB's decision to provide liquidity to banks that grant credit to companies and individuals. These injections of liquidity will continue until March 2021.

Global trade contraction

A second factor that has had a significant effect on the economic slowdown has been the drop in international trade. Already in Economipedia we explained the causes of the drop in trade in his article "Global trade grows at its worst rate since the great crisis."The rise of protectionism and the trade wars between the United States and China have ended up weighing down trade exchanges, not forgetting events such as Brexit, which will obviously have negative effects on trade in the European Union.

The consequences of Brexit

Despite the damaging impacts of Brexit, Draghi argues that central banks and European institutions are already prepared for the UK's goodbye. According to Draghi, those who must prepare for Brexit are private companies. It is clear that the effect of Brexit will be more profound the greater the degree of trade relations of a European Union country with Great Britain.

The consequences of Brexit can be especially harsh not just for Britain, but for the European Union. This would mean the loss of the important British market, especially affecting countries like Germany. It should be noted that the United Kingdom is one of Germany's main trading partners, which would have important consequences for the German economy, which already fell by 0.2% in the third quarter of last year and stagnated in the last quarter of 2018.

However, Mario Draghi's analysis is very different, as he argues that, despite the slowdown in international trade, the impacts on private consumption and investment are not yet worrying.

In conclusion, Draghi and the ECB see risks that are reflected in a drop in economic growth figures, but it is still too early to launch the alert about a threat of recession. The question is whether domestic demand will be sufficient to contain the decline in international trade and the slowdown.

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