In terms of quarterly performance, a significant rebound is expected over the summer in line with the removal of the most severe lockdown measures. However, the scenarios differ in terms of the duration and severity of virus-related restrictions on economic activity and the behaviour of households and firms in the rest of 2020 and throughout 2021. In all scenarios, a deep recession is envisaged: in the severe scenario, real GDP would fall by 12 percent in 2020. Chart 1 Euro area real GDP under the mild, medium and severe scenarios  https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200519~e5203d3520.en.html  1/14  5/19/2020  Pandemic central banking: the monetary stance, market stabilisation and liquidity  (index, 2019 Q4 = 100)  Source: ECB calculations. Note: For details on the scenarios, see Battistini, N. and Stoevsky, G (2020), “Alternative scenarios for the impact of the COVID-19 pandemic on economic activity in the euro area”, Economic Bulletin, Issue 3, European Central Bank. Chart 2 shows the household savings rate, as projected in the European Commission Spring Forecast that was published a couple of weeks ago. The household savings rate is forecast to jump by a remarkable 6 percentage points to around 19 percent for 2020, and is expected to remain elevated even in 2021. Although “forced saving” during the lockdown is surely contributing to the increase in household saving, it is plausible that the precautionary motive will remain significant so long as virus-related uncertainty persists. Elevated uncertainty may also hamper investment prospects for an extended period of time.
As a result, companies that can bypass the banks to access capital markets directly are doing so. Indeed, in the first four months of this year, more finance was raised in debt and equity markets than is normally the case in an entire year. Most companies, however, especially smaller and medium-sized enterprises, rely heavily on bank finance. And with current market sentiment it may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery. That is likely to take time. It is too soon to reverse the extraordinary policy stimulus that has been injected into the UK economy through monetary policy, the provision of liquidity support to banks, guarantees of bank funding, and fiscal policy. Nevertheless, it is not too early to prepare such “exit strategies” and to explain how they would work. The challenge facing the Monetary Policy Committee is straightforward in principle but difficult in practice. As activity returns to more normal levels, the outlook for inflation will pick up. And it is the outlook for inflation that will guide decisions on the pace and timing of a withdrawal of monetary stimulus. Reaching judgements on the outlook for inflation is never easy, and assessing their implications for policy will always be a matter of balancing risks. In contrast, the choice of instruments is simple.