Source: http://www.ecb.europa.eu/pub/economic-bulletin/html/eb201602.en.html
Timestamp: 2017-04-23 09:58:03
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The slowdown in US labour productivity growth – stylised facts and economic implications
Factors behind the comparatively strong activity in euro area services
Transmission of output shocks – the role of cross-border production chains
At its monetary policy meeting on 10 March 2016, based on the regular economic and monetary analyses, the Governing Council conducted a thorough review of the monetary policy stance, in which it also took into account the new macroeconomic projections by ECB staff extending into the year 2018. As a result, the Governing Council decided on a set of measures in the pursuit of its price stability objective. This comprehensive package will exploit the synergies between the different instruments and has been calibrated to further ease financing conditions, stimulate new credit provision and thereby reinforce the momentum of the euro area’s economic recovery and accelerate the return of inflation to levels below, but close to, 2%. Economic and monetary assessment at the time of the Governing Council meeting of 10 March 2016
Global activity moderated at the turn of the year, and is expected to continue expanding at a modest pace. Low interest rates, improving labour markets and rising confidence support the outlook for advanced economies. By contrast, the medium-term outlook for emerging market economies remains more uncertain. Economic activity in China is expected to continue decelerating, with negative spillovers to other emerging market economies, particularly in Asia, while commodity exporting countries need to adjust further to lower commodity prices. In this context, the effective exchange rate of the euro has appreciated significantly over recent months.
Financial markets have shown heightened volatility in recent months. Initially, global growth concerns contributed to a decline in the prices of riskier financial assets from the beginning of December 2015 to mid-February. However, more recently, these declines have been partly reversed, related to reduced investor concerns amid a rise in oil prices, better than expected economic data in the United States and expectations of further monetary policy stimulus in the euro area. Sovereign bond yields in higher-rated countries have declined further in the last three months. The economic recovery in the euro area is continuing, albeit with lower than expected growth at the beginning of the year on the back of a weaker external environment. Real GDP rose by 0.3%, quarter on quarter, in the fourth quarter of 2015, supported by domestic demand, while being dampened by a negative contribution from net exports. The most recent survey data point to weaker than expected growth momentum at the beginning of this year. Looking ahead, the economic recovery is expected to proceed at a moderate pace. Domestic demand should be further supported by the ECB’s monetary policy measures and their favourable impact on financing conditions, as well as by continued employment gains from past structural reforms. Moreover, the low price of oil should provide additional support for households’ real disposable income and private consumption, as well as for corporate profitability and investment. In addition, the fiscal stance in the euro area is slightly expansionary, partly reflecting measures in support of refugees. However, the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms.
The March 2016 ECB staff macroeconomic projections for the euro area foresee annual real GDP increasing by 1.4% in 2016, 1.7% in 2017 and 1.8% in 2018. Compared with the December 2015 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised slightly down, mainly reflecting the weakened growth prospects for the global economy. In the Governing Council’s assessment, risks to the euro area growth outlook remain tilted to the downside and relate in particular to the heightened uncertainties regarding developments in the global economy, as well as to broader geopolitical risks.
According to Eurostat’s flash estimate, euro area annual HICP inflation was -0.2% in February 2016, compared with 0.3% in January. All main HICP components contributed to this decline. Inflation rates should recover later in 2016 and rise further thereafter, supported by the ECB’s monetary policy measures and the expected economic recovery. The March 2016 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018. In comparison with the December 2015 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down, mainly reflecting the fall in oil prices over recent months. The Governing Council will closely monitor price-setting behaviour and wage developments in the euro area, paying particular attention to ensure that the current low inflation environment does not become entrenched in second-round effects on wage and price-setting.
The ECB’s monetary policy measures continue to be transmitted to lending conditions and remain supportive of broad money and credit dynamics. Money growth has remained solid, while loan growth has continued on the path of gradual recovery observed since the beginning of 2014. Domestic sources of money creation continue to be the main driver of broad money growth. Low interest rates, as well as the effects of the ECB’s targeted longer-term refinancing operations (TLTROs) and the expanded asset purchase programme (APP), have contributed to improvements in money and credit dynamics. Banks’ funding costs have stabilised close to their historical lows. Despite considerable cross-country heterogeneity, banks have been passing on their favourable funding conditions in the form of lower lending rates. Improved lending conditions have continued to support a recovery in loan growth. The total annual flow of external financing to non-financial corporations is estimated to have increased further in the fourth quarter of 2015, after stabilising in the previous two quarters. Overall, the monetary policy measures in place since June 2014 have improved borrowing conditions for firms and households substantially.
The Governing Council assessed that a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for further monetary stimulus in order to secure a return of inflation rates towards levels below, but close to, 2% without undue delay. Economic and financial conditions had weakened further since the last meeting of the Governing Council in January and risks to the Governing Council’s medium-term price stability objective had clearly increased, as also indicated by the downward revisions for inflation and growth in the March 2016 staff macroeconomic projections. As a result, the Governing Council decided on a set of measures in the pursuit of its price stability objective. First, as regards the key ECB interest rates, the Governing Council decided to lower the interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00% and the rate on the marginal lending facility by 5 basis points to 0.25%. The rate on the deposit facility was lowered by 10 basis points to -0.40%. Second, the Governing Council decided to expand the monthly purchases under the APP from €60 billion to €80 billion. They are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term. To ensure the continued smooth implementation of the asset purchases, the Governing Council also decided to increase the issuer and issue share limits for the purchases of securities issued by eligible international organisations and multilateral development banks from 33% to 50%.
Third, the Governing Council decided to include investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area in the list of assets that are eligible for regular purchases under a new corporate sector purchase programme. This will further strengthen the pass-through of the Eurosystem’s asset purchases to the financing conditions of the real economy. Purchases under the new programme will start towards the end of the second quarter of this year.
Fourth, the Governing Council decided to launch a new series of four targeted longer-term refinancing operations (TLTRO II), starting in June 2016, each with a maturity of four years. These new operations will reinforce the ECB’s accommodative monetary policy stance and will strengthen the transmission of monetary policy by further incentivising bank lending to the real economy. Counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 31 January 2016. The interest rate under TLTRO II will be fixed over the life of each operation, at the rate on the Eurosystem’s main refinancing operations prevailing at the time of take-up. For banks whose net lending exceeds a benchmark, the rate applied to the TLTRO II will be lower, and can be as low as the interest rate on the deposit facility prevailing at the time of take-up. There will be no requirement for mandatory early repayments under TLTRO II, and switches from TLTRO I will be allowed.
Looking ahead, taking into account the current outlook for price stability, the Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases. Adding to the measures taken since June 2014, the comprehensive package of monetary policy decisions taken in March 2016 provides substantial monetary stimulus to counteract heightened risks to the ECB’s price stability objective. While very low or even negative inflation rates are unavoidable over the next few months, as a result of movements in oil prices, it is crucial to avoid second-round effects by securing the return of inflation to levels below, but close to, 2% without undue delay. The Governing Council will continue to monitor very closely the evolution of the outlook for price stability over the period ahead.
Global activity slowed at the turn of the year, but is expected to continue to expand at a gradual pace. Low interest rates, improving labour markets and growing confidence support the outlook for advanced economies. By contrast, the medium‑term outlook for emerging market economies (EMEs) remains more uncertain. Growth in China continues to slow, with negative spillovers to other EMEs, particularly in emerging Asia, and commodity-exporting countries need to adjust further to lower commodity prices
. Global economic activity and trade Developments in both advanced economies and EMEs at the end of 2015 turned out to be weaker than expected. The recovery is expected to be more gradual than anticipated, confirming that growth momentum remains fragile. Following robust growth in the third quarter, the US economy experienced a marked slowdown in the last quarter of 2015. The Japanese economy also lost momentum, contracting again in the fourth quarter. Among the major advanced countries, excluding the euro area, only the United Kingdom appears to have maintained sustained robust growth in the second half of last year. Growth momentum in EMEs also slowed in the last quarter of the year. Emerging Asia is one of the drivers of this slowdown, partly because of the ongoing rebalancing in China. Activity in Latin America slowed towards the end of 2015, mainly on account of the deep recession in Brazil and, more broadly, the adverse effects of low commodity prices on commodity-producing countries in the region. Chart 1Global composite output PMI(diffusion index)
global excluding euro area (right-hand scale)
global excluding euro area – long-term average (right-hand scale) advanced economies excluding euro area (left-hand scale)
emerging market economies (left-hand scale)
Sources: Markit and ECB calculations. Note: The latest observation is for February 2016.
Global activity indicators confirm that world growth moderated at the turn of the year. The global composite output PMI (excluding the euro area) fell rather sharply in February to levels just above the expansionary threshold (see Chart 1). The decline was broad based across advanced economies and EMEs. It was not only driven by continued subdued developments in global manufacturing, but also by a significant fall in services activity. This could indicate that the ongoing weakness in global manufacturing may be spilling over into the services sector, which until now has been more resilient. At the same time, the OECD’s composite leading indicators point to signs that economic growth is slowing in the OECD area as a whole. Chart 2Financial conditions indices(standard deviation, zero mean; monthly data)
tighter financial
looser financial
advanced economies excluding euro area
Sources: Haver Analytics and ECB staff calculations. Notes: The latest observation is for February 2016. Emerging market economies is an aggregate of China, Russia, Brazil, India and Turkey. Advanced economies include the United States, the United Kingdom and Japan.
Three key factors have been shaping the global outlook, namely a tightening of financing conditions in EMEs, uncertainty regarding the outlook for China and the continued weakness in commodity prices. The tightening of financing conditions in EMEs (see Chart 2) is evident in the rise in government bond yields, substantial downward correction in equity prices and net capital outflows from these economies amid elevated levels of global market volatility. This volatility was partly associated with growing uncertainty around China’s economic prospects. Finally, the continued weakness in commodity prices, particularly oil prices, has been increasingly interpreted as a sign of underlying weakness in the global economy.
In response to the increased signs of global weakness, markets have pushed back expectations of monetary policy normalisation in the United States and the United Kingdom. Since the policy rate increase in the United States in December 2015 the funds futures curve of the Federal Reserve System has significantly shifted downwards, suggesting expectations of a delay in further tightening of US monetary policy. Monetary policy tightened in some EMEs in response to the US hike, particularly in countries that have close trade links with the United States, such as those in Latin America, and in countries whose currencies are linked to the US dollar. While declines in commodity prices in the course of 2015 were mostly attributed to a sharp rise in supply, greater importance has been attached to the role of demand factors in explaining the recent downward pressures on oil prices. The nature of an oil price shock can have very different implications for the global economy (see also Box 2). The largely supply-driven drop in oil prices in the second half of 2014 and early 2015 had a net positive impact on global GDP, mainly via two channels: (i) an income redistribution from oil-producing countries to oil-consuming countries, which then had a larger marginal propensity to spend; and (ii) profitability gains from lower energy‑input costs, which stimulated investment and thus total supply in net oil-importing countries. However, the gradual shift towards a more demand-driven oil price fall in the second half of last year warrants a more cautious interpretation. Although low oil prices could still have a positive impact on commodity-importing countries as a result of rising real incomes, weaker external demand is expected to broadly offset the positive effects of falling oil prices on activity. Moreover, the negative impact of additional price declines on oil-exporting countries has been more severe than expected. For some countries, managing surging fiscal imbalances in order to cushion the impact of the oil price decline may be challenging and could result in a greater than expected reduction in domestic and foreign demand. Looking ahead global economic activity should expand at a gradual pace, supported by ongoing resilient growth prospects in major advanced economies, and the expected progressive easing of the deep recessions in some large EMEs. Continued low interest rates, improving labour markets and rising consumer confidence support the outlook for advanced economies. By contrast, the medium-term outlook for EMEs remains more uncertain. The pace of growth in the Chinese economy continues to slow with negative spillovers to other EMEs, particularly in emerging Asia, while commodity-exporting countries need to adjust further to lower commodity prices. Nevertheless, the gradual easing of the deep recessions in Russia and Brazil should support global growth.
Domestic fundamentals remain supportive in the United States. Growth is expected to accelerate as the recovery in the labour market gradually feeds through into gains in nominal wages, which, together with continued low oil prices, support real disposable income and consumption. A continuation of the housing market recovery and a slightly expansionary fiscal stance should also support domestic demand, which is expected to remain the main driver of US growth. At the same time, credit and financing conditions have become somewhat tighter despite low interest rates, while lower oil prices are taking away some momentum from private investment. Net exports are expected to remain a drag on activity on the back of the appreciation of the US dollar and weak growth in foreign demand. In this context, Box 1 reviews the factors behind the slowdown in US labour productivity growth and its economic implications.
Economic activity in the United Kingdom continues to grow at a moderate pace. Growth is largely consumption driven, as low energy prices continue to lift real disposable incomes. Investment growth remains positive, albeit slowing compared with previous years, supported by easing credit conditions. However, growth could potentially be restrained by the uncertainty surrounding the referendum on the United Kingdom’s membership of the European Union in June 2016. Net exports exerted a drag on growth in the last two quarters of 2015. The economic recovery in Japan has remained weak. Following a mild return to growth in the third quarter of 2015, the economy contracted again in the final quarter of the year amid slowing global demand and lacklustre private consumption. Looking ahead growth should return to positive territory in 2016, as private consumption is expected to recover amid higher real incomes stemming from wage increases and lower oil prices. Exports are also expected to pick up amid a gradual rebound in foreign demand. The rebalancing of the Chinese economy is translating into a gradual slowdown,as declining investment has not been fully offset by stronger consumer spending. Low oil prices and robust consumption are expected to provide some support for the economy in the near term. While the recent unwinding of excessive stock market valuations has heightened uncertainty, this is not deemed to have had major direct repercussions on the outlook. Recent reductions in policy rates, modest fiscal stimulus from the central government and efforts to loosen constraints on local government finances should have a positive influence on demand going forward. In the medium term, however, increasing emphasis on reducing overcapacity in some heavy industries and dealing with the related non-performing loans could slow the pace of expansion, primarily through the investment channel.
Real economic activity in central and eastern Europe (CEE) – albeit uneven across countries – is projected to remain robust. The main drivers of growth in the region continue to be dynamic private consumption, which benefits from higher real disposable income amid the low inflation environment, and strong investment growth supported by EU structural funds. By contrast, commodity-exporting countries continue to face the consequences of the sustained decline in commodity prices. In Russia, which is still in the midst of a deep recession, funding costs remain elevated despite the easing of financial conditions that took place during 2015. The further fall in oil prices increased depreciation pressures on the Russian rouble, potentially resulting in higher inflation. Uncertainty remains high and business confidence weak, while lower oil revenue continues to restrain public expenditure. In Latin America, the economic downturn in Brazil has intensified sharply. Political uncertainty, deteriorating terms of trade amid falling commodity prices and tightening monetary policy and financing conditions are all weighing on economic activity. Looking forward, however, the deep recessions in Brazil and Russia are expected to ease amid stabilisation in their respective currencies and commodity prices.
Chart 3World trade in goods(left-hand scale: three-month-on-three-month percentage changes; right-hand scale: diffusion index)
world trade (left-hand scale)
world trade 1991-2007 average (left-hand scale)
global PMI new export orders (right-hand scale)
global PMI excluding euro area manufacturing (right-hand scale)
Sources: Markit, CPB and ECB calculations. Note: The latest observation is for February 2016 for PMIs and December 2015 for world trade.
Global trade seems to have lost momentum again at the turn of the year, after having returned to positive growth in the second half of 2015. Global imports of goods and services (excluding the euro area) increased by 0.7% quarter on quarter in the third quarter, following a decline of 0.9% in the second quarter (see Chart 3). The rebound partly reflects a correction of the low figures recorded in some advanced economies and EMEs, such as the United Kingdom, Japan and China, which was mainly associated with volatility in the data. At the same time, it accounts for slightly less pronounced declines in Brazil and Russia, countries in which the sharp fall of imports can be largely explained by the slump in domestic demand and the depreciation of the exchange rate. However, initial trade data and surveys for the fourth quarter suggest that the pace of global trade growth is slowing again. The growth in world imports of goods slowed to 0.7% (in three-month-on-three-month terms) in November, from 1.7% in October. Import growth momentum again turned negative in EMEs in the light of a sharp drop in emerging Asia (as well as in the Middle East and Africa). By contrast, import growth remained more robust in advanced economies, albeit also moderating somewhat from October. Moreover, global new export orders declined in February to 49.4, down from 50.4 in the previous month, indicating renewed weakness in world trade growth at the turn of the year. Overall, the outlook for global growth remains one of a gradual and uneven recovery. According to the March 2016 ECB staff macroeconomic projections, world real GDP growth excluding the euro area is projected to accelerate only very gradually from 3.1% in 2015 to 3.2% in 2016, 3.8% in 2017 and 3.9% in 2018. Euro area foreign demand is expected to expand from 0.4% in 2015 to 2.2% in 2016, 3.8% in 2017 and 4.1% in 2018. Compared with the December 2015 projections, this constitutes a downward revision to world growth, reflecting the weaker than expected outlook in both advanced economies and EMEs. Revisions to euro area foreign demand are broadly in line with those to world growth.
Risks to the outlook for global activity remain on the downside, most prominently for EMEs. A key downside risk is a stronger slowdown in EMEs, including China. Tightening financial conditions and heightened political uncertainty may exacerbate existing macroeconomic imbalances, denting confidence and slowing growth more than expected. Policy uncertainty about the economic transition in China may lead to an increase in global financial volatility. Geopolitical risks also continue to weigh on the outlook. Finally, persistently low oil prices are aggravating fiscal imbalances and raising financial stability issues in some major oil-exporting countries.
Global price developments Global inflation has increased in recent months, but remains at rather low levels overall. Annual consumer price inflation in the OECD area increased further to 1.2% in January, from 0.9% in December, mainly because of a less negative contribution from energy prices (see Chart 4). Although remaining at low levels, this represents a significant increase relative to the last quarter of 2015 (when the average was 0.7%). Excluding food and energy, OECD annual inflation remained unchanged at 1.9% relative to the previous month, only marginally above the last quarter of 2015 (when it was 1.8% on average). Energy prices continued to fall for the seventeenth consecutive month in January (-5.3% year on year), but at a slower pace, while food price inflation remained broadly unchanged. Among individual countries, headline inflation increased in Canada, the United Kingdom and the United States, while it fell within negative territory in Japan. Among major non-OECD economies, headline inflation increased in China, but declined in India and Russia, while annual inflation remained unchanged at double-digit levels in Brazil.
Chart 4Consumer price inflation(year-on-year percentage changes)
Sources: National sources and OECD. Note: The latest observation is for January 2016.
After falling to 12-year lows at the end of January, oil prices have since recovered somewhat. Oil prices experienced a renewed downturn between mid-October 2015 and the end of January 2016 against the background of an oversupplied oil market and weakening oil demand. On the supply side, OPEC’s decision in December to maintain current production levels at record rates and resilient non-OPEC output fuelled downward dynamics. More recently, discussions about an OPEC and non-OPEC agreement on freezing output at January levels and supply disruptions in Iraq and Nigeria contributed to a slight recovery. In the face of heightened volatility, oil prices increased in February and early March. The global oil market continues to be oversupplied as a result of: (i) a low likelihood of a concerted output cut by OPEC and non-OPEC producers; (ii) the return of Iran to global oil markets; and (iii) weakening oil demand. OPEC members continue to produce at near record-high levels, and non-OPEC output also remains high, with Russia producing at record levels, although US shale oil production is showing signs of a steep decline. OECD oil inventories increased further and were at record levels at the end of the fourth quarter of 2015. Non-oil commodity prices have increased somewhat since the end of January on the back of higher metal prices.
Global inflation is expected to remain subdued in the medium term. On the one hand, low oil and other commodity prices should dampen inflationary pressures further in the short term. At the same time, output gaps are closing slowly in advanced economies and are widening in several EMEs, pointing to continued abundant spare capacity at the global level, which is expected to further weigh on global underlying inflation over the medium term. On the other hand, the upward sloping oil futures curve implies significant increases in oil prices over the medium term.
Recent months have been characterised by high financial market volatility. Global growth concerns and a further fall in oil prices contributed to a decline in the prices of riskier financial assets from the beginning of December 2015 to mid-February. Thereafter the declines were partly reversed as a rise in oil prices, better than expected economic data in the United States and expectations of further monetary policy stimulus in the euro area reduced investors’ concerns. Euro area equity prices declined overall by around 12% over the review period – i.e. from 2 December 2015 to 9 March 2016 – having been temporarily down by more than 20% by mid-February. At the same time, yields of higher-rated sovereign bonds declined as investors sought safer assets
. From early December 2015 to mid-February 2016, global growth concerns and a further fall in oil prices contributed to a sharp decline in the prices of risky assets, which was partly reversed thereafter. Concerns about global growth intensified at the start of 2016 amid a sharp drop in Chinese equity prices and oil prices. These concerns were also fuelled by negative economic indicators in the euro area and the United States, which led to a downward re-pricing of financial assets. From mid-February to early March, a rise in oil prices, better than expected economic indicators in the United States and expectations of further monetary policy stimulus in the euro area contributed to a partial rebound in riskier asset prices. Large fluctuations were also visible in measures of equity market volatility, which increased significantly until mid-February before receding somewhat towards the end of the review period. Chart 5EONIA forward rates(percentages per annum)
The EONIA declined over the review period following the Governing Council’s decision to cut the deposit facility rate by 0.10% to -0.30% in December 2015. After ranging between -13 and -15 basis points during the week before the December 2015 rate cut took effect, the EONIA then remained in a range between -22 and -25 basis points, with the exception of a temporary increase at the end of 2015 owing to higher demand for liquidity. The decline in the EONIA occurred against the backdrop of rising excess liquidity in the context of purchases under the expanded asset purchase programme. Box 3 presents more detailed information on euro area liquidity conditions and monetary policy operations. The EONIA forward curve flattened significantly as global uncertainty and expectations about monetary policy compressed yields across the curve. Longer-term EONIA forward rates declined by around 50 basis points during the review period, with somewhat smaller declines at the short end of the curve. This decline led to a further flattening of the curve (see Chart 5). On 9 March the lowest point of the curve stood at around -50 basis points, indicating market expectations of further reductions in the deposit facility rate prior to the Governing Council meeting on 10 March. The large decline in EONIA forward rates can to some extent be explained by expectations of further monetary policy stimulus from the ECB, with the decline amplified by the increase in global uncertainty that led to shifts in demand for safer assets, including those closely linked to EONIA rates.
Chart 6Ten-year sovereign bond yields in selected euro area countries(percentages per annum)
Notes: The item “euro area” denotes the GDP-weighted average of ten-year sovereign bond yields. The latest observation is for 9 March 2016.
The GDP-weighted average of ten-year euro area sovereign bond yields declined by 11 basis points between early December and 9 March (see Chart 6). Euro area sovereign bond yields initially increased after the meeting of the ECB’s Governing Council in early December. From the beginning of January 2016 the increase in global uncertainty and the build-up of market expectations of further monetary policy stimulus in the euro area exerted downward pressures on euro area sovereign bond yields, which more than reversed the increase observed in December. Overall, the GDP-weighted average of ten-year euro area sovereign bond yields declined by 11 basis points between early December 2015 and early March, standing at 0.9% on 9 March. There was some divergence in sovereign bond yields across countries, with higher-rated countries recording larger declines. By contrast, yields in the majority of lower-rated countries were unchanged or increased slightly over the same period. In Portugal, sovereign bond yields fluctuated significantly, reflecting market concerns about the state budget and the reform agenda of the newly elected government. Chart 7Corporate bond yields in the euro area(percentages per annum)
Sources: iBoxx and ECB.
Notes: The latest observation is for 9 March 2016.
The global sell-off of risky assets also affected corporate bonds, with spreads of lower-rated bonds increasing more than higher-rated ones. While corporate bond spreads increased, corporate bond yields for both financials and non-financials were volatile, but remained overall more or less unchanged over the review period (see Chart 7) as the increase in credit spreads was, on average, offset by declining risk-free rates. Corporate bond yields for both financial and non-financial firms remain very low from a longer-term perspective.
Chart 8Euro area and US equity price indices(1 January 2015 = 100)
Note: The latest observation is for 9 March 2016.
Euro area equity markets strengthened towards the end of the review period, after having declined substiantially between early December and mid- February. Euro area equity prices, as measured by the broad EURO STOXX index, declined by around 21% between early December and 11 February (see Chart 8) as global uncertainty increased. Between 11 February and 9 March equity prices increased again, resulting in an overall decline over the review period of 12%. Prior to the recovery in equity prices, bank equities across the euro area declined significantly more than the overall market as concerns emerged over general profitability in the banking sector, coupled with some country and bank-specific events. Specifically, the EURO STOXX bank equity price index declined by 35% between early December and mid-February. Thereafter, it increased somewhat towards the end of the review period, resulting in an overall decline of around 22%. Equity markets in the United States saw similar fluctuations, albeit smaller, with the S&P 500 index recording an overall decline of only 4%. Chart 9Changes in the exchange rate of the euro against selected currencies(percentage changes)
EER-38
since 9 March 2015
Notes: Percentage changes relative to 9 March 2016. EER-38 is the nominal effective exchange rate of the euro against the currencies of 38 of the euro area’s most important trading partners.
The effective exchange rate of the euro appreciated significantly over the three months under review. The euro appreciated markedly in effective terms between early December 2015 and mid-February 2016 amid the increase in global uncertainty. Since then, the euro has slightly depreciated in effective terms and against the US dollar amid widening long-term bond yield spreads between the United States and the euro area and expectations of further monetary policy stimulus from the ECB. Overall, the euro strengthened by 3.7% in trade-weighted terms over the review period (see Chart 9). In bilateral terms, the euro appreciated by 3.4% against the US dollar over the same period. Heightened uncertainty surrounding the United Kingdom’s referendum on EU membership weighed on the pound sterling, resulting in the euro appreciating by 9.3%. The euro also appreciated strongly against the Russian rouble, the Chinese renminbi and the currencies of emerging market economies and commodity-exporting countries. Higher volatility and the decline in risk appetite supported the Japanese yen, leading to a euro depreciation against the Japanese currency by 5.4%.
The economic recovery in the euro area is continuing, albeit with signs of a moderation in growth at the beginning of the year due to a weaker external environment. Real GDP growth was 0.3% quarter on quarter in the fourth quarter of 2015, unchanged from the previous quarter. The latest survey indicators point to weaker than expected growth momentum at the beginning of 2016. Looking ahead, the economic recovery is expected to proceed at a moderate pace. Domestic demand should be further supported by the ECB’s monetary policy measures and their favourable impact on financial conditions, the slightly expansionary fiscal stance, and the favourable impact on employment of past structural reforms. The low price of oil should provide additional support for households’ real disposable income and corporate profitability, and thus for private consumption and investment. However, the economic recovery continues to be dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms. The March 2016 ECB staff macroeconomic projections foresee somewhat lower euro area real GDP growth in 2016, at 1.4% (revised down from 1.7%), in 2017, at 1.7% (revised down from 1.9%) and in 2018, at 1.8%
. Chart 10Euro area real GDP and its composition(quarter-on-quarter percentage changes and quarter-on-quarter percentage point contributions)
Note: The lastest observation is for the fourth quarter of 2015.
The economic recovery in the euro area is continuing but global developments are weighing on the short-term outlook. Real GDP grew by 0.3% quarter on quarter in the fourth quarter of 2015, unchanged from the previous quarter, with continued positive contributions from private consumption, albeit to a lesser extent than in the previous quarter, a pick-up in investment and a continued rise in government consumption (see Chart 10).[1] As a result, the level of output stood around 3% above its recent trough and only 0.2% below its pre-crisis peak in the first quarter of 2008. In 2015 as a whole, real GDP grew by 1.6%, its strongest increase since 2011. Chart 11Total euro area exports of goods(year-on-year percentage changes and year-on-year percentage point contributions)
China, Russia, Latin America
non-euro area Europe
intra-euro exports
Note: The latest observation is for the fourth quarter of 2015. For EU Countries, the fourth quarter is based on data for October and November.
The slowdown in emerging market economies weighed on euro area export growth throughout 2015 and headwinds continued to strengthen in the last quarter. The slowdown in China, weak demand in Russia and the recession in Brazil remained a drag on euro area goods exports (see Chart 11). This led to a negative net export contribution of 0.3 percentage point to real GDP growth in the last quarter of 2015. While the slowing of demand in some large emerging market economies such as China had adverse effects on euro area activity, the impact through the trade channel is not likely to be as great as traditional gross trade figures would normally imply.[2] The slowing of growth in emerging markets over the course of 2015 was partly offset by the strength of domestic demand in the euro area, which supported intra-euro area trade. In addition, demand from other advanced economies (particularly those within Europe) was also relatively strong. Combined with favourable euro exchange rate developments from mid-2014 onwards, this supported growth in euro area exports, leading to significant gains in export market shares for euro area exporters.
Chart 12Euro area real gross value added by economic activity(index: Q1 2008 = 100)
Note: The latest observation is for the fourth quarter of 2015.
Both export orders and sentiment indicators point to rather subdued global trade developments in the near term. Moreover, the effective exchange rate of the euro appreciated in the first few months of 2016, which will diminish the favourable impact of the previous depreciation of the currency (2014-15) further ahead. However, as global activity gradually picks up, euro area export growth is expected to increase and gain more momentum in line with foreign demand. At the sector level, services value added has exceeded its pre-crisis level, while industry and construction have not yet done so (see Chart 12). The ongoing economic recovery has largely been driven by private consumption and thus benefited the services sector, with value added in this sector now standing 3% above its pre-crisis peak.[3] For industry (excluding construction), value added growth in 2015 was hampered by the weak external environment and currently stands below its pre-crisis peak. Construction, which suffered a considerable decline due to large housing market corrections following the 2008-09 crisis in a number of countries, has stabilised at low levels. In the fourth quarter of 2015, value added growth continued to increase in the services sector and rebounded somewhat in the construction sector following the relatively mild weather conditions, which supported construction activity in some euro area countries. At the same time, value added in industry (excluding construction) declined. Note: The latest observation is for the fourth quarter of 2015 for real GDP, January 2016 for the ESI and February 2016 for the PMI. The ESI and PMI are normalised.
Chart 13Euro area real GDP, the Economic Sentiment Indicator and the composite output Purchasing Managers’ Indexleft-hand scale: diffusion index and percentage balances; right-hand scale: quarterly growth rates)
real GDP (right-hand scale)
ESI (left-hand scale)
composite PMI (left-hand scale)
Sources: Markit, DG-ECFIN and Eurostat.
Survey data available to February point to moderate growth at the beginning of the year. Both the European Commission’s Economic Sentiment Indicator (ESI) and the composite output Purchasing Managers’ Index (PMI) declined over the first two months of 2016 (see Chart 13) but remain above their respective long-term average levels. The declines in sentiment have been rather broad-based among business sectors and households and relate to expectations about demand and production, as well as to households’ assessments of their current economic situation. Chart 14Building permits(index, 2010 = 100, three-month moving averages)
building permits, total
Note: The series are seasonally adjusted, with the exception of non-residential building permits, which are not seasonaly adjusted.
Investment growth gathered momentum in the fourth quarter, most likely due to investment in both construction and non-construction equipment. Following weak investment growth in the second and third quarters of 2015, the pick-up in investment growth in the fourth quarter was relatively broad-based across euro area countries. Looking forward, non-construction investment is expected to recover on the back of gradually strengthening demand, improving profit margins and further diminishing spare capacity. Financing conditions are also improving and ample supplies of cash among euro area firms should be available for investment. Likewise, highly favourable financing conditions and low mortgage rates, together with growth in households’ disposable income, should bolster demand for residential property in the period ahead and support construction investment. Indeed, signs of strengthening housing markets and increases in applications for building permits in some countries tend to confirm this picture (see Chart 14). Moreover, construction-related survey indicators at the beginning of 2016 suggest a strengthening in the underlying growth momentum of construction investment. Nevertheless, the further need for corporate deleveraging in some countries, recent financial market volatility, weaker growth prospects in emerging market economies and investors’ reduced long-term growth expectations may slow the recovery in investment.
Private consumption, which has been the main driver of the ongoing recovery, moderated at the end of 2015. This partly reflected a dampening impact on seasonal clothing sales and energy consumption due to the relatively mild weather conditions, as well as the November terrorist attacks in Paris. Data on retail trade and new passenger car registrations for January point to a rebound in consumer spending and tend to confirm that the slowing of private consumption growth in the last quarter of 2015 was temporary. From a broader perspective, consumer spending has benefitted from rising real disposable income among households, primarily reflecting rising employment, lower oil prices and a fairly stable saving ratio. Moreover, households’ balance sheets have gradually become less constrained and consumer confidence has remained relatively strong due to declining unemployment rates. Chart 15Employment, employment expectations and unemployment rate(quarter-on-quarter percentage changes; diffusion index; percentage of labour force)
employment (left-hand scale)
PMI employment expectations (left-hand scale)
unemployment rate (right-hand scale)
Sources: Eurostat, DG-ECFIN and ECB calculations.
Note: The latest observation is for the third quarter of 2015 for employment, January 2016 for the unemployment rate and February 2016 for the PMI employment expectations.
The euro area unemployment rate has continued to decline but remains high. In January 2016, the unemployment rate stood at 10.3%, its lowest rate since mid-2011 (see Chart 15). Employment has been increasing steadily since 2013 and total euro area employment increased by over two million in the third quarter of 2015. However, since the crisis, there has been a divergence between headcount employment and total hours worked, primarily driven by a cyclical decline in the working hours of full-time workers and an increase in the use of part-time workers, mainly in the services sector. Wider measures of labour market slack – which also take into account sectors of the population that are involuntarily working part-time or that have withdrawn from the labour market – remain high. With roughly seven million people (5% of the labour force) currently involuntarily working part-time owing to a lack of full-time work and more than six million discouraged workers (those who have given up looking for work and have withdrawn from the labour market), the euro area labour market likely exhibits more slack than suggested by the unemployment rate alone. The economic recovery is projected to strengthen, albeit dampened by weaker than expected foreign demand. Headwinds stemming from weaker growth in emerging market economies, a strengthening of the effective exchange rate of the euro, weakened sentiment and increased financial market volatility will weigh on euro area activity in the short term. Looking further ahead, the domestic demand-led recovery should continue to be supported by the effects of the ECB’s monetary policy measures, which continue to be transmitted to the real economy as indicated by the further easing of credit conditions. Domestic demand should be further supported by improving labour markets, lower oil prices, the slightly expansionary fiscal stance and an eventual pick-up in euro area foreign demand. At the same time, the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging market economies and the sluggish pace of implementation of structural reforms.[4]
Chart 16Euro area real GDP (including projections)
Sources: Eurostat and the article entitled “March 2016 ECB staff macroeconomic.
projections for the euro area”, published on the ECB’s website on 10 March 2016.
The March ECB staff projections foresee annual real GDP growth to be 1.4% in 2016, 1.7% in 2017 and 1.8% in 2018 (see Chart 16). The downward revision of real GDP growth compared with the December projections mainly reflects the combined adverse impact of lower euro area foreign demand and the stronger effective exchange rate of the euro on export growth, as well as the negative impact of heightened financial market volatility and weaker sentiment indicators. The risks to the euro area growth outlook remain on the downside, reflecting in particular heightened uncertainties regarding developments in emerging market economies and broader geopolitical risks.
Prices and costs According to Eurostat’s flash estimate, euro area annual HICP inflation was -0.2% in February 2016, compared with 0.3% in January. All main HICP components contributed to this decline. Looking ahead, on the basis of current futures prices for energy, inflation rates are expected to remain at negative levels in the coming months and to pick up later in 2016. Thereafter, supported by the ECB’s monetary policy measures and the expected economic recovery, inflation rates should recover further. This broad pattern is also reflected in the March 2016 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018. In comparison with the December 2015 Eurosystem staff macroeconomic projections for the euro area, the outlook for HICP inflation has been revised down, mainly reflecting the fall in oil prices over recent months
Chart 17Euro area HICP inflation (including projections)(annual percentage changes)
Source: Eurostat, March 2016 ECB staff macroeconomic projections and ECB calculations.
Note: The latest observation is for the fourth quarter of 2015 (actual data) and the fourth quarter of 2018 (projections).
Headline inflation moved back into negative territory in February. According to Eurostat’s flash estimate, headline inflation fell to -0.2%, down from 0.3% in January, with all main components of the HICP contributing to the decline (see Charts 17 and 18). The recent further drop in oil prices brought down the already negative annual rate of energy price inflation even further. At the same time, the moderate increases in food price inflation and in HICP inflation excluding food and energy also slowed. The path of energy inflation continues to shape the profile of headline inflation. After a low of -8.9% in September 2015, the year-on-year HICP energy inflation rate recovered to -5.4% in January 2016, owing mainly to upward base effects. This development accounted for most of the recovery in the headline HICP inflation rate from -0.1% in September 2015 to 0.3% in January 2016. However, renewed oil price declines in December 2015 and January 2016 caused HICP energy inflation to fall again to a year-on-year rate of -8.0% in February, accounting for approximately half of the decline in headline HICP inflation (see Chart 18). The strongest impact of oil prices on energy inflation is visible in fuel prices (see Box 6). Chart 18Contribution of components to euro area headline HICP inflation(annual percentage changes; percentage point contributions)
Note: The latest observations are for February 2016 (fl ash estimates).
Increases in food price inflation have continued to unwind in recent months. Having followed an upward trend for most of 2015, food price inflation started to decline in the third quarter, falling from a year-on-year rate of 1.6% in October 2015 to 0.7% in February 2016, according to Eurostat’s flash estimate. This decline was driven almost entirely by unprocessed food prices, as a result of the unwinding of the upward effects of last summer’s unusually hot weather on vegetable and food prices. By contrast, processed food price inflation continued to increase during that period. Overall, however, food price inflation remains at a relatively low level by historical standards.[5]
Chart 19Measures of underlying inflation(annual percentage changes)
HICP excluding food and energy range of underlying inflation measures
Notes: In the range of underlying measures, the following have been considered: HICP excluding energy; HICP excluding unprocessed food and energy; HICP excluding food and energy; trimmed mean (10%); trimmed mean (30%); the median of the HICP; and a measure based on a dynamic factor model. The latest observations are for February 2016 (HICP excluding food and energy, fl ash estimate) and January 2016 (all other measures).
Measures of underlying inflation fail to show any clear upward trend. Following an upward movement in the first half of 2015, HICP inflation excluding food and energy hovered between year-on-year rates of 0.9% and 1.1% from July 2015 to January 2016 and has therefore been much more stable than headline inflation (see Box 7). Other measures of underlying inflation also remained relatively stable during the same period (see Chart 19). In February, the annual rate of HICP inflation excluding food and energy declined to 0.7% – its lowest level since April 2015. This decrease resulted from lower year-on-year rates of increase in both the prices of services (1.0%, following 1.2% in January) and of non-energy industrial goods (0.3%, following 0.7% in January). When interpreting the latest data for HICP inflation excluding food and energy, it should be borne in mind that annual rates of change in services prices and non-energy industrial goods prices can be highly volatile from one month to another. This volatility can stem, for example, from variations in the timing and extent of end-of-season sales of clothing and footwear, or from calendar effects for travel-related items. However, there may be other more fundamental factors affecting developments in underlying inflation, such as the indirect downward impact of recent further oil price declines (notably on some transport-related services prices). In addition, the recent appreciation of the effective exchange rate of the euro could mean that the anticipated upturn (particularly in durable goods prices) as a result of the earlier depreciation may not fully materialise. Chart 20Euro area wage developments(annual percentage changes; percentage points)
growth in compensation per employee
Note: The latest observations are for the fourth quarter of 2015 (negotiated wages) and the third quarter of 2015 (all other indicators).
Import prices have grown less strongly recently, but remain the main source of upward pipeline pressures. In 2015 import price inflation in consumer goods excluding food and energy was buoyant, reaching a record high of 5.6% in April of that year. Owing to the recent appreciation of the effective exchange rate of the euro and also to the impact of global disinflationary pressures stemming from lower oil prices, import price inflation in consumer goods excluding food and energy has since fallen, reaching 1.6% in January 2016. However, it remained the principal source of inflationary pressures, given that pipeline pressures from domestic sources were generally more subdued. Notably, the inflation rate in domestic producer prices for non-food consumer goods remained stable at 0.2% for six consecutive months up to January 2016. Survey data on input and output prices for the period up to February 2016 also point to a continuation of subdued domestic price pressures at the producer level. Wage growth has remained subdued. At an annual average of 1.2%, growth in compensation per employee was lower in the first three quarters of 2015 than in 2014 (1.4%). This was due to weaker negotiated wage growth (1.5% in 2015, following 1.7% in 2014) and a decline in social security contributions primarily related to country-specific factors (see Chart 20). Wage growth is likely being held back by a range of factors, including continued elevated levels of slack in the labour market, low inflation and the ongoing effects of labour market reforms implemented in past years in a number of euro area countries. Weak growth in wages is also reflecting relatively weak productivity growth, which can partly be explained by the fact that much of the recent strong growth in employment has taken place in the services sector, where productivity and wage levels have been relatively low.
Chart 21Market-based measures of inflation expectations(annual percentage changes)
one-year rate one year ahead
one-year rate two years ahead
one-year rate four years ahead
one-year rate nineyears ahead
five-year rate five years ahead
Note: The latest observations are for 9 March 2016.
Market-based indicators of long-term inflation expectations have fallen since mid-January in a turbulent market environment, while survey-based measures have remained more stable. Short to long-term market-based indicators of inflation expectations continue to stand at very low levels, with the five-year forward inflation rate five years ahead reaching a new all-time low in February. These exceptionally low levels in part reflect relatively weak appetite in the market for holding financial instruments with inflation-linked cash flows. This indicates that market participants consider it very unlikely that inflation will pick up soon. At the same time, market-based measures of inflation expectations may currently be somewhat distorted amid renewed market turbulence and a flight to liquidity. More specifically, the five-year inflation-linked swap rate five years ahead declined from 1.58% to 1.46% between 18 January 2016 and 9 March 2016 (see Chart 21). Despite the low level of actual inflation and declining market-based inflation indicators, the deflation risk priced in by the market continues to be very limited. In contrast to market-based measures, survey-based measures of long-term inflation expectations, such as those included in the ECB Survey of Professional Forecasters (SPF) and in Consensus Economics surveys, have been more stable and resilient to the downward adjustment of shorter-term expectations. The results of the latest SPF showed the average point forecast for inflation five years ahead standing at 1.8%.
Looking forward, HICP inflation for the euro area is projected to remain low in 2016 but to pick up in 2017 and 2018. Based on the information available in mid-March, the March 2016 ECB staff macroeconomic projections for the euro area foresee that HICP inflation will remain very low at 0.1% in 2016, rising to 1.3% in 2017 and 1.6% in 2018 (see Chart 17).[6] Over the projection horizon, developments in energy price inflation are expected to play a major role in shaping the profile of HICP inflation. The contribution of energy price inflation is forecast to be negative in 2016 but to turn positive in 2017 as a result of increases in oil prices (in line with oil futures prices) and strong upward base effects. Underlying inflation (as measured, for example, by HICP inflation excluding food and energy) is expected to increase gradually in the coming years as improving labour market conditions and declining economic slack translate into higher wages and profit margins. This increase will be supported by the effects of the ECB’s monetary policy measures and the continuing pass-through of previous declines in the effective exchange rate of the euro. Compared with the December 2015 Eurosystem staff macroeconomic projections for the euro area, the outlook for HICP inflation has been revised downwards, mainly on the back of lower energy price inflation.
Money growth has remained solid, while loan growth is recovering only gradually.
Domestic sources of money creation continue to be the main driver of broad money growth. Low interest rates, as well as the effects of the ECB’s targeted longer-term refinancing operations (TLTROs) and the expanded asset purchase programme (APP), have contributed to improvements in money and credit dynamics. Banks’ funding costs have stabilised close to their historical lows. Despite considerable cross-country heterogeneity, banks have been passing on their favourable funding conditions in the form of lower lending rates. Improved lending conditions have continued to support a recovery in loan growth. The total annual flow of external financing to non-financial corporations (NFCs) is estimated to have increased further in the fourth quarter of 2015, after stabilising in the previous two quarters
Chart 22M3, M1 and loans to the private sector (annual percentage changes; adjusted for seasonal and calendar effects)
Note: The latest observation is for January 2016.
Broad money growth remained solid. The annual growth rate of M3 stayed strong at 5.0% in January 2016, unchanged from the fourth quarter of 2015 (see Chart 22). Money growth was once again supported by the most liquid components of the broad monetary aggregate M3. The annual growth rate of M1 decreased in January 2016, but maintained a high level. Overall, recent developments in narrow money suggest that the euro area remains on a path of economic recovery.
Chart 23M3 and its components(annual percentage changes; contributions in percentage points; adjusted for seasonal and calendar effects)
Overnight deposits, which account for a significant proportion of M1, continued to boost M3 growth (see Chart 23). The very low interest rate environment is providing incentives for holding the most liquid components of M3. This development also reflects inflows relating to the sale of public sector bonds, covered bonds and asset-backed securities by the money-holding sector in the context of the APP. By contrast, short-term deposits other than overnight deposits (i.e. M2 minus M1) contracted further, albeit to a lesser extent than in previous months. The growth rate of marketable instruments (i.e. M3 minus M2), a small component of M3, was negative around the turn of the year, despite the recovery in money market fund shares/units observed since mid-2014. Domestic sources of money creation were again the main driver of broad money growth. This development is partly explained by the ECB’s non-standard monetary policy measures. From a counterpart perspective, the largest sources of money creation in January 2016 were the bond purchases made by the Eurosystem in the context of the public sector purchase programme (PSPP) and shifts away from longer-term financial liabilities. A significant percentage of those assets were purchased from MFIs (excluding the Eurosystem). The annual rate of change of MFIs’ longer-term financial liabilities (excluding capital and reserves) remained strongly negative at -6.9% in January 2016, broadly the same as in the fourth quarter of 2015. This reflects the flatness of the yield curve, linked to the ECB’s non-standard monetary policy measures, which has reduced incentives for investors to hold longer-term bank assets. The attractiveness of the TLTROs as an alternative to longer-term market-based bank funding is a further explanatory factor. In addition, money creation continued to be supported by credit from MFIs to the euro area private sector. The MFI sector’s net external asset position was again a drag on annual M3 growth. This development reflects capital outflows from the euro area and the ongoing portfolio rebalancing in favour of non-euro area instruments (more specifically, the euro area government bonds sold by non-residents under the PSPP).
Chart 24MFI loans to NFCs in selected euro area countries (annual percentage changes)
Notes: Adjusted for loan sales and securitisation. The cross-country dispersion is calculated on the basis of minimum and maximum values using a fixed sample of 12 euro area countries. The latest observation is for January 2016.
Chart 25MFI loans to households in selected euro area countries(annual percentage changes)