Recovery slows and inflation turns negative

The rebound phase has now come to an end. Retail sales declined in July and both the business surveys and high frequency data suggest that economic activity levelled off in August. Of course, the initial rapid pace of recovery was never going to be sustained, but the recent weakness has been compounded by the surge in virus cases – particularly in Spain. For now, the second wave of infections has not led to an increase in hospitalisations because cases are concentrated among younger people. However, it has prompted governments to re-impose restrictions on travel and entertainment and households to be more cautious. Meanwhile, headline inflation turned negative in August and the core rate – which excludes food, alcohol, tobacco and energy prices – dropped to its lowest ever level. (See Chart 1.) The ECB is sure to stick to its ultra-loose policy settings at next week’s Governing Council meeting.