The European Central Bank (ECB) President warned the euro area would have to closely monitor disinflation and inflation levels while the Continent’s economy undergoes a profound shift prompted by the coronavirus pandemic. She said there would be an “acceleration of transformations” that would see traditional working methods and supply chains, such as the introduction of more robotics, completely overhauled. Ms Lagarde told a video conference: “The transition to new economic models will be disruptive – they will probably be more disruptive in the first two years, obviously hitting employment and production – and then we can hope it improves productivity.
“So the inflation dynamic will necessarily be impacted, probably with disinflationary, deflationary aspect at first, then an inflation dynamic.”
The head of the ECB said the use of robots could increase by between 70 and 75 percent as bosses prepare for a post-pandemic way of working.
Supply chains could also shrink by around 35 percent as companies become less reliant supply vast networks because of their fragility exposed by coronavirus.
“It is currently estimated that the crisis should lead to a contraction of supply chains of around 35 percent and an increase in robotisation in industries of around 70 to 75 percent,” she said.
She also warned of a much larger shift away from the high street to online shopping after the majority of people were forced to change their purchasing habits during the lockdown.
Ms Lagarde said this development should further accelerate in the future “to the detriment of more traditional trade”.
The Eurozone chief said the economic consequences of the virus would likely result in increased inequalities across the Eurozone.
The drastic shift in economic patterns will only add to the pressure on Europe as it faces its deepest recession since the end of the Second World War.
But Ms Lagarde added Europe is in an “excellent position” to use the transformations to combat climate change.
“I am determined to have the same debate with governors at the ECB to ensure that in all areas, climate risk and biodiversity is taken into account,” she said.
“We won’t do it in one day, but we must question in every domain, stress test by stress test.”
Despite the gloomy forecasts, the Eurozone is showing slight signs of recovery as governments ease their lockdowns.
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New domestic orders increased by more than 12 percent, while orders from the rest of the Eurozone rose almost 21 percent.
However in the rest of the world they were up only by two percent.
Carsten Brzeski, an economist at ING, said: “Normally the eurozone always sees net exports rising first and kick-starting a recovery, which is followed by domestic demand coming back.
“But there are many reasons to believe that is not the case this time and the latest data back this up.”