Luis de Guindos: Remarks at the European Economics and
Financial Centre
Remarks by Mr Luis de Guindos, Vice-President of the European Central Bank, at the European
Economics and Financial Centre, London, 2 March 2020.
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I am delighted to be here today at the European Economics and Financial Centre. I will use this
opportunity to provide a very brief overview of the economic situation and financial system
vulnerabilities in the euro area.
Prior to the coronavirus outbreak, the outlook for global economic activity had been showing
some signs of improvement. The US-China "phase-one" agreement had contributed to reduce
uncertainty around trading relationships, as had the arrangement of a Brexit transition period. The
global weakness, however, remained a drag on euro area growth by dampening manufacturing
activity.
Meanwhile, the euro area growth outlook showed signs of stabilisation after the persistent
deceleration throughout 2018. Forward-looking survey indicators pointed to mild improvements.
Although the latest industrial output figures demonstrated that overcoming the manufacturing
recession continued to be challenging, we could draw some comfort from the fact that no
spillovers from the manufacturing to the services sector were observed. In the third quarter of
2019, euro area consumption increased by 0.5% quarter-on-quarter, while resilient retail sales
and broadly stable consumer confidence indicated robust consumer spending also for the
months ahead. The services sector continues to be strong and survey indicators remain in
expansionary territory. Consumption has been supported by positive labour market
developments: employment in the euro area expanded by 0.3% quarter-on-quarter at the end of
2019, while unemployment declined further to 7.4% in December, reaching its lowest level since
May 2008.
Over recent weeks, however, the coronavirus added a new layer of uncertainty to global and euro
area growth prospects. The outbreak has the potential to affect the euro area economy through
both demand- and supply-side channels. Euro area foreign demand could be directly hit as a
result of quarantine measures in China and the associated suspension of production lines. This
may affect euro area exports, and could cause disruption in global supply chains and the
production of intermediate products. The euro area services sector, too, could be affected by
travel disruptions. If the virus spreads more widely, domestic firms could be more directly
affected due, for example, to supply chain delays.
We remain vigilant and will closely monitor all incoming data. Our forward guidance steers the
orientation of our monetary policy. In any case, the Governing Council stands ready to adjust all
its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained
manner.
In terms of nominal developments, headline inflation increased to 1.4% in January, up from 1.3%
in December 2019, reflecting mainly higher energy and food inflation. Measures of underlying
inflation are subdued, although they have mildly increased from earlier lows.
Wage growth remains resilient and broad-based and is expected to support up inflation in the
coming months. The decline in unemployment and the tightening of labour markets have further
increased labour cost pressures. Recent data on negotiated wages continue to signal robust
wage growth, which is expected to gradually push up underlying inflation. However, the weaker
growth momentum is delaying the pass-through to inflation, as firms appear to be absorbing
wage rises in their profit margins rather than passing them on to customers.
An ample degree of monetary accommodation is still necessary. The policy stimulus that is in
place is working its way through the economy and is expected to support growth and job
creation, a key precondition for inflation to move towards our medium-term inflation aim.
At the same time, financial stability vulnerabilities have increased over recent months. Global
financial markets have been impacted by intensified concerns about the spread of the virus.
Decoupled from fundamentals, higher valuations of some asset classes may have left them
more vulnerable to disorderly asset price corrections.
Low profitability of euro area banks and increased size and risk-taking of the non-banks continue
to be important vulnerabilities in the financial sector. In the banking sector, signs of increased risk
taking require close monitoring, as do search for yield and increasing liquidity risk in the
investment fund sector.
This challenging environment reminds us of the importance that European and Monetary Union
becomes more resilient to adverse shocks. The banking union remains incomplete without EDIS
and visible progress is needed on capital markets union (CMU). In particular, Brexit calls for
developing capital markets in areas where the EU financial system currently strongly relies on
the City. At this stage, CMU should be a priority for all EU members to strengthen capital market
financing of the economy and cross-border risk sharing through deeper and integrated bond and
equity markets.