The Chief Economist of the European Central Bank, Philip Lane, has said the macroeconomic hit from Covid-19 is likely to persist even after medical solutions have been rolled out.
In a speech delivered online to the TCD Economics Department - his alma mater- Philip Lane said that without the action the ECB has already taken in response to the pandemic, the economic output of the eurozone would have fallen by an additional 1.3% and inflation would be 0.8% lower in cumulative terms by 2022.
He said the current surge in infections and re-imposition of containment measures across Europe are warning signals that the recovery path will still be 'long and fraught with risks.'
He said lower income households have been most affected by the economic impact of the pandemic but they have also benefited more from government support.
There is also evidence, he said, that companies are taking on more debt and this could lead to a reduction in investment during the post-pandemic recovery.
He also warned about worrying signals in recent surveys of banks lending out less due to concerns about the creditworthiness of borrowers and the perception of a worsening economic outlook.
On inflation, the ECB chief economist said accepting "a longer phase of even lower inflation" would hurt consumption and investment as well as cementing expectations for low price growth in the future.
The bank is preparing a new stimulus package to help cushion the impact of the coronavirus pandemic.
It is also reviewing the way it goes about its business, after failing to raise inflation to its target for almost a decade.
Professor Lane said that simply letting price growth undershoot the ECB's target of just under 2% was not an option.
"Tolerating a longer phase of even lower inflation than originally envisaged would be costly and risky," Mr Lane told an academic audience via weblink.
"First, it would imply a weaker recovery of consumption and investment, as a result of higher expected real interest rates," the former Irish Central Bank governor said.
"Second, it would contribute to a downward drift in inflation expectations that might become entrenched," he added.
Fellow ECB board member Isabel Schnabel said this week the bank should consider taking longer to raise inflation to its 2% target as its ultra-easy policy is constrained, has side effects and risks alienating the public.
Under its strategic review, the ECB is expected to change its goal to 2% over an unspecified "medium term" and reaffirm its commitment to symmetry, meaning that any undershooting of the target should be taken seriously.
The ECB has kept the money taps wide open for years and promised further stimulus, likely in the form of even more bond purchases and subsidised loans to banks, at its December 10 meeting.
ECB policymakers gathering last month agreed they could not afford to seem complacent in the face of a second-wave of coronavirus infections, after already underwhelming investors twice since the start of the pandemic.
The ECB triggered a market backlash during the first wave of the pandemic in March, when investors deemed its initial moves too timid.
It disappointed them again in September when it was expected to intervene more forcefully against a rally in the euro.
"Any sign of complacency - even inadvertent - could be detrimental in the present circumstances," the ECB said in its account of the meeting, which was published today.
Lending to euro zone companies was already slowing in October, with banks increasingly worried about credit risk as the bloc heads into a double-dip recession, ECB data showed today.
Since then, however, three drug-makers have published encouraging results from their trials of vaccines against Covid-19.
That fuelled some optimism among policymakers, but comments by Austrian governor Robert Holzmann and Irish Central Bank chief Gabriel Makhlouf suggested policy easing remained firmly on the cards.