Source: https://www.ecb.europa.eu/pub/economic-bulletin/html/eb201701.en.html
Timestamp: 2019-09-23 16:16:52
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1 Economic growth in the euro area is broadening
2 Financial cycles and the macroeconomy
4 The role of energy base effects in short-term inflation developments
5 What has been driving developments in professional forecasters’ inflation expectations?
1 MFI lending rates: pass-through in the time of non‑standard monetary policy
The monetary policy decisions taken in December 2016 have succeeded in preserving the very favourable financing conditions that are necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. Borrowing conditions for firms and households continue to benefit from the pass-through of the ECB’s measures. As expected, headline inflation has increased recently, largely owing to base effects in energy prices, but underlying inflation pressures remain subdued. The Governing Council will continue to look through changes in HICP inflation if judged to be transient and to have no implication for the medium-term outlook for price stability.
Available global indicators point to a continued moderate rebound in world activity and trade growth towards the end of 2016. Meanwhile, global financial conditions have tightened and emerging market economies have been confronted with capital outflows. Global headline inflation has increased on the back of waning negative contributions from energy prices. Risks to the outlook for world activity remain on the downside and relate, in particular, to political uncertainty and financial imbalances.
Since the Governing Council meeting on 8 December 2016, sovereign bond yields in the euro area have declined slightly and the EONIA forward curve has edged downwards for medium-term maturities. Equity prices of non-financial corporations have risen and the spreads on corporate debt have fallen. The euro exchange rate remained broadly stable in trade-weighted terms.
The economic expansion in the euro area is proceeding and strengthening, driven mainly by domestic demand. Looking ahead, the economic expansion is expected to firm further. The pass-through of the ECB’s monetary policy measures is supporting domestic demand and facilitating the ongoing deleveraging process. The very favourable financing conditions and improvements in corporate profitability continue to promote the recovery in investment. Moreover, sustained employment gains, which are also benefiting from past structural reforms, provide support for private consumption via increases in households’ real disposable income. At the same time, there are signs of a somewhat stronger global recovery. However, economic growth in the euro area is expected to be dampened by a sluggish pace of implementation of structural reforms and remaining balance sheet adjustments in a number of sectors. The risks surrounding the euro area growth outlook remain tilted to the downside and relate predominantly to global factors.
According to Eurostat, euro area annual HICP inflation in December 2016 was 1.1%, up from 0.6% in November. This reflected mainly a strong increase in annual energy inflation, while there are no signs yet of a convincing upward trend in underlying inflation. Looking ahead, on the basis of current oil futures prices, headline inflation is likely to pick up further in the near term, largely reflecting movements in the annual rate of change of energy prices. However, measures of underlying inflation are expected to rise more gradually over the medium term, supported by the ECB’s monetary policy measures, the expected economic recovery and the corresponding gradual absorption of slack.
Although developments in bank credit continue to reflect the lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets, the monetary policy measures put in place since June 2014 are significantly supporting borrowing conditions for firms and households and thereby credit flows across the euro area. The euro area bank lending survey for the fourth quarter of 2016 indicates that credit standards for loans to enterprises are broadly stabilising, while loan demand has continued to expand at a robust pace across all loan categories. Loan growth to the private sector has thus continued its gradual recovery. Moreover, the overall nominal cost of external financing for non-financial corporations is estimated to have declined slightly in December.
At its meeting on 19 January 2017, based on the regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged. The Governing Council continues to expect 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. Regarding non-standard monetary policy measures, the Governing Council confirmed that the Eurosystem will continue to make purchases under the asset purchase programme at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 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 inflation aim. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme.
Looking ahead, the Governing Council confirmed that a very substantial degree of monetary accommodation is needed for euro area inflation pressures to build up and support headline inflation in the medium term. If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate. In particular, if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration.
Surveys point to a continued moderate recovery of global growth towards the end of 2016. The global composite output Purchasing Managers’ Index (PMI) reached the highest level recorded in more than a year (Chart 1), increasing to 53.3 in the final quarter of 2016. Quarterly PMIs rose in all major advanced economies, with PMIs in Japan returning to an expansionary path. PMIs increased in China and Russia, while India’s PMI showed a sharp decline in light of the disruptive effects of the recent government decision to change the legal tender status of some of its currency notes. Survey indicators remained very weak in Brazil.
Note: The latest observations are for December 2016.
Global financial conditions have tightened. Bond yields increased in the United States and across the world in recent months. The tightening of financial conditions has, in part, reflected central bank action in the United States. In December 2016, the Federal Reserve System's Federal Open Market Committee decided to raise the target range for the federal funds rate by 25 basis points, to 0.5% to 0.75%. Amid tighter financial conditions, some emerging market economies (EMEs) have faced considerable capital outflow pressures towards the end of 2016 (see Chart 2). Mexico and Turkey were affected to a particular degree, recording a noticeable depreciation of their currencies and a sharp rise in interest rates. In Turkey, global developments were amplified by domestic political uncertainties and macroeconomic vulnerabilities. China also experienced significant capital outflows and a reduction of its foreign exchange reserves. In Russia, by contrast, the rouble appreciated and stock prices surged, mainly on account of the recovery in oil prices.
Emerging market economies’ capital flows
(USD billions, 28-day trailing moving-average)
-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 2012 2013 2014 2015 2016 2017 equity flows debt flows total flows
Notes: The most recent observation refers to 18 January 2017. Positive values correspond to capital inflows, while negative values refer to capital outflows. The sample of emerging market economies includes Indonesia, India, Korea, Thailand, South Africa, Brazil, Philippines and Turkey.
Global trade remained on a path of subdued recovery towards the year-end. Global trade growth remained in positive territory for the fourth time in succession in October, with the volume of world goods imports increasing by 0.8% in that month (in three month-on-three month terms), after a weak first half of 2016. Leading indicators also confirm the positive trend. The global PMI for new export orders reached its highest level in more than two years, rising to 51.4 in December.
Global inflation continued to increase in November, on the back of waning negative contributions from energy prices. Annual consumer price inflation in the member countries of the Organisation for Economic Co-operation and Development (OECD) picked up to 1.4% in November, reaching the highest figure in two years. Excluding food and energy, annual inflation in the OECD stabilised at 1.7%. Fading base effects of past declines in commodity prices are expected to support a further increase in headline inflation in the months ahead, while the presence of spare capacity will continue to weigh on global inflation.
The price of Brent crude oil remained in the range of USD 52 to USD 56 in the wake of the announcement of cuts in oil production. Oil prices were supported by the decision taken by the Organization of the Petroleum Exporting Countries (OPEC) on 30 November to cut output by 1.2 million barrels per day as from January 2017, and were buoyed further by non-OPEC producers’ agreement on 12 December to cut output by 0.6 million barrels per day. At horizons beyond six months, market expectations have remained largely unaffected by the OPEC decision, suggesting that this has not changed the fundamentals of the oil market. Global oil supplies totalled 98.2 million barrels per day in November, a record high, as reductions of non-OPEC output were offset by increased OPEC production. The growth in oil demand is expected to have continued in the fourth quarter of 2016 (by 1.3 million barrels per day relative to a year ago), driven partly by upward revisions to Chinese consumption. The prices of non-oil commodities have increased marginally since mid-December, driven mainly by a substantial rise in iron ore and copper prices, related to higher-than-expected demand for metals in China and some supply disruptions.
Economic activity in the United States is robust, notwithstanding significant political uncertainty. Real GDP grew at an annualised rate of 3.5% in the third quarter of 2016, supported primarily by consumer spending, net trade and a turnaround in the contribution of inventories. Recent indicators suggest a continued robust expansion in the final quarter of 2016, albeit at a slower pace than in the previous quarter. Notwithstanding political uncertainty – as only few details have emerged of policy changes under the new Administration – confidence surveys released after the US elections suggest an upbeat near-term outlook. Labour market conditions tightened further, with monthly increases in non-farm payroll employment averaging 165,000 in the three months up to December. This contributed to a further acceleration of wage gains, with annual growth in average hourly earnings rising to 2.9%. In December, annual headline consumer price index (CPI) inflation in the United States increased to 2.1%, mainly on the back of higher gasoline prices, while the CPI excluding food and energy rose to 2.2%.
Economic growth in Japan remains modest. Real GDP there increased by 0.3%, quarter on quarter, in the third quarter of 2016, as both domestic demand growth and net trade remained subdued. Latest data suggest a pick-up in real exports and industrial production towards the end of the year, while the momentum of private consumption remained weak, and surveys suggest that companies remain cautious about the outlook. Despite the tight labour market, evidenced by the unemployment rate remaining at 3% in October, annual real wage growth was flat in October. Headline CPI inflation rose further in November, standing at 0.5%, year on year. At the same time, annual growth in the CPI excluding fresh food and energy – the Bank of Japan’s preferred measure of core inflation – decelerated to 0.2%.
In the United Kingdom, recent indicators suggest renewed signs of economic resilience amid a notable increase in inflation. In the third quarter of 2016, real GDP increased by 0.6%, quarter on quarter, defying expectations of an abrupt slowdown in the immediate aftermath of the UK referendum on EU membership. Available indicators suggest that economic activity remained resilient in the final quarter of the year. Annual CPI inflation accelerated to 1.6% in December 2016, driven partly by energy prices. The impact of the weakening of the pound sterling is also becoming increasingly visible in the first stages of the pricing chain, as shown by sharp increases in import and producer prices over recent months.
Economic growth in the Chinese economy has stabilised. The latest data are consistent with a stabilisation of real GDP growth, following the rise to 6.7%, year on year, in the third quarter. Data covering November show stable overall industrial production growth, with a pick-up in activity by state-owned enterprises. Fixed-asset investment has stabilised as well, while PMIs have trended higher since the mid-year. Annual CPI inflation stood at 2.1% in December, down from 2.3% in November. CPI inflation excluding food and energy remained unchanged at 1.9%. Meanwhile, annual producer price inflation has picked up strongly, accelerating to 5.5% in December, the highest rate of increase recorded since September 2011, as prices for mining products and energy rose sharply.
Euro area government bond yields have decreased slightly since early December. During the period under review (8 December 2016 to 18 January 2017), interest rates on euro area ten-year sovereign bonds decreased by around 5 basis points. Spreads vis-à-vis German ten-year bonds remained broadly stable in most countries, with the exception of Greece where they rose by 48 basis points.
60 80 100 120 01/16 07/16 01/17 euro area financials euro area non - financials US financials US non - financials
Notes: Daily data. The black vertical line refers to the start of the review period (8 December 2016). The latest observation is for 18 January 2017.
Euro area equity prices have increased since early December. At the end of the period under review, the equity prices of euro area non-financial corporations (NFCs) were around 4% higher than at the beginning. The equity prices of financial corporations fell slightly; however, over a longer horizon, they are now around 30% higher than the lows recorded in the aftermath of the outcome of the United Kingdom’s referendum on EU membership (see Chart 3). During the period under review, equity prices of NFCs also increased in the United States, the United Kingdom and Japan, namely by around 2%, 6% and 1% respectively. The equity prices of financial corporations underperformed relative to NFCs in all three economic areas. Market expectations of equity price volatility fell slightly in the euro area, and remain significantly lower than historical averages.
Spreads on bonds issued by NFCs fell during the period under review. On 18 January, investment-grade NFC bond spreads were around 3 basis points lower than on 8 December, and 45 basis points lower than in March 2016, when the Governing Council announced the launch of the corporate sector purchase programme (CSPP). Spreads on non-investment grade NFC and financial sector debt (which is ineligible for purchase under the CSPP) also declined during the period under review, by 19 and 3 basis points respectively.
The euro overnight index average (EONIA) remained stable at around -35 basis points in the period under review, except for a small increase at the end of the year. During the period under review, excess liquidity increased by around €80 billion, to around €1,265 billion, in the context of the Eurosystem’s purchases under the asset purchase programme. The increase in excess liquidity also reflected participation in the third targeted longer-term refinancing operation (TLTRO-II).
The EONIA forward curve has flattened slightly. During the period under review, the EONIA forward curve for medium-term maturities moved downwards by around 5 basis points. The downward shift of the curve for maturities below two years has been marginal, and the curve remains below zero for maturities prior to 2021.
-20 -15 -10 -5 0 5 10 15 20 25 30 Croatian kuna Indian rupee Brazilian real Taiwan dollar Romanian leu Danish krone Hungarian forint Indonesian rupiah South Korean won Turkish lira Russian rouble Swedish krona Czech koruna Polish zloty Japanese yen Swiss franc Pound sterling US dollar Chinese renminbi EER-38 since 8 December 2016 since 18 January 2016
In foreign exchange markets, the euro was broadly stable in trade-weighted terms. In bilateral terms, since 8 December, the euro has appreciated by 2.2% against the pound sterling, amid heightened uncertainty about the United Kingdom’s prospects of leaving the European Union. The euro depreciated vis-à-vis a number of other major currencies of advanced economies, including the US dollar (by 0.9%), the Japanese yen (by 1.3%) and the Swiss franc (by 1.4%). The euro also depreciated against most currencies of emerging market economies, including the Chinese renminbi (by 1.5%), as well as against the currencies of other non-euro area EU countries (see Chart 4).
Economic expansion in the euro area is proceeding and strengthening, driven mainly by domestic demand. In addition, growth has been broadening across sectors and, more recently, also across countries (see Box 1). Real GDP increased by 0.3%, quarter on quarter, in the third quarter of 2016, on the back of positive contributions from domestic demand and, to a lesser extent, changes in inventories (see Chart 5). At the same time, net trade provided a negative contribution to GDP growth in the third quarter. The latest economic indicators, both hard data and survey results, have continued to show some resilience and point to somewhat stronger growth in the fourth quarter.
-0.5 0.0 0.5 1.0 45 50 55 60 2011 2012 2013 2014 2015 2016 real GDP (right - hand scale) ESI (left - hand scale) composite output PMI (left - hand scale)
Notes: The ESI is normalised with the mean and standard deviation of the PMI. The latest observations are for the third quarter of 2016 for real GDP and December 2016 for the ESI and the PMI.
Consumer spending, the main driver behind the ongoing recovery, continued to contribute positively to GDP growth in the third quarter of 2016. Private consumption growth stood at 0.3%, quarter on quarter, only slightly higher than in the second quarter. This relatively modest outcome, at least when seen in comparison with developments in 2015 and early 2016, may partly reflect heightened uncertainty in the wake of the referendum in the United Kingdom and terror attacks, as well as the increase in oil prices in the course of 2016. On an annual basis, consumption rose by 1.6% in the third quarter, after 1.7% in the second quarter. This slight moderation mirrored a sharper slowdown in households’ real disposable income growth, to 1.7%, year on year, in the third quarter, from 2.5% in the previous quarter. Income growth, despite the latest decline, remains high by historical standards. Indeed, consumer spending during the ongoing recovery has been benefiting from rising real disposable income for households, which has primarily reflected rising employment and low oil prices.
Euro area labour markets have improved further, thus continuing to support consumption. Employment rose further, by 0.2%, quarter on quarter, in the third quarter of 2016, resulting in an annual increase of 1.2%. Since the second quarter of 2013, when employment first started to pick up, the number of persons employed has risen by an accumulated 3.1%. The unemployment rate in the euro area was unchanged at 9.8% in November 2016, i.e. 2.3 percentage points below its post-crisis peak in April 2013 (see Chart 6). This decline was broad-based across gender and age groups. Long-term unemployment (persons who have been unemployed for at least 12 months) remains slightly above 5% of the labour force.
9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 2011 2012 2013 2014 2015 2016 employment (left - hand scale) PMI employment expectations (left - hand scale) unemployment rate (right - hand scale)
Notes: The PMI is expressed as the deviation from 50 divided by 10. The latest observations are for the third quarter of 2016 for employment, December 2016 for the PMI and November 2016 for unemployment.
Going forward, consumption growth should strengthen. After having edged down in the third quarter of 2016, consumer confidence increased significantly in the fourth quarter. As a result, consumer sentiment stands well above its long-term average. Moreover, data on retail trade (up to November 2016) and new passenger car registrations (for the full fourth quarter) are in line with positive growth in consumer spending in the fourth quarter, possibly at a somewhat faster pace than in the third quarter. Moreover, further employment growth, as suggested by the latest survey indicators, should also continue to support consumer spending. Finally, households’ balance sheets have become less constrained, as indicated by the declining debt-to-income ratio. This is a development that should add to the robustness of overall consumption growth.
Investment activity slowed in the third quarter, after a quite positive outcome in the second quarter. According to Eurostat’s second estimate of euro area national accounts for the third quarter of 2016, published on 6 December 2016, total investment rose by 0.2%, quarter on quarter, reflecting a rise in construction investment that was partly offset by a decline in non-construction investment. The decline in non-construction investment in the third quarter was due to a contraction of investment in transport equipment, which can partly be viewed as a reversal after the favourable growth outcome in the second quarter. Investment in other equipment remained broadly unchanged in the third quarter, while investment in intellectual property products posted positive growth. At the same time, the increase in construction investment mainly reflected rising housing investment. The latest developments in construction investment tend to confirm the recovery in the sector.
In the fourth quarter of 2016, incoming information suggests that business investment picked up, while construction investment rose at a slightly slower pace than in the third quarter. The increase in industrial production of capital goods over October and November suggests stronger growth in business investment in the fourth quarter. Moreover, confidence in the capital goods sector was, on average, higher in the fourth quarter than in the third quarter, and the assessment of order books improved both overall and in terms of orders from abroad. With regard to construction investment, monthly construction production data point to positive growth in the fourth quarter of 2016, albeit less marked than in the third quarter. In addition, survey indicators on the demand situation and the assessment of order books, as well as building permits, are still in line with a continued recovery in the short term.
The recovery in investment is expected to continue beyond the near term. Business investment is likely to be supported by very favourable financing conditions, replacement needs and improving profits. Box 2 discusses the impact of financial cycles on potential output and related measurement issues. As regards construction investment, factors such as households’ rising disposable income and improving lending conditions should underpin demand in the sector. Downside risks to the outlook for business investment relate to geopolitical factors, including uncertainties surrounding “Brexit” and US trade policies.
Extra-euro area goods trade data point to slightly improving export momentum in the fourth quarter. While total euro area exports declined in the third quarter, mainly on account of weak goods exports, monthly trade outcomes for October and November suggest that extra-euro area goods export growth increased somewhat in the fourth quarter. This slight upturn was driven by demand from both emerging and advanced economies. Among the emerging market economies, export growth to China accelerated, together with positive export growth to Russia and Latin America. As for the advanced economies, exports to the United States were broadly stable, while exports to non-euro area Europe are likely to have increased.
Euro area exports are expected to gradually recover in line with global trade. Survey indicators signal improvements in foreign demand and new export orders. In addition, the depreciation of the effective exchange rate of the euro since the third quarter of 2016 should provide some gains in competiveness for euro area exporters. However, any emergence of protectionist tendencies around the world could pose downside risks to the outlook for foreign demand in the longer term.
Overall, the latest economic indicators are, on balance, consistent with somewhat stronger growth in the last quarter of 2016 than in in the third quarter. Industrial production (excluding construction) in October and November was, on average, 1.0% above the level recorded in the third quarter, when production rose by 0.5% on a quarterly basis. More timely survey data are also in line with moderately increasing growth in the near term. The composite output Purchasing Managers’ Index (PMI) averaged 53.8 in the fourth quarter of 2016, compared with 52.9 in the third quarter, while the European Commission’s Economic Sentiment Indicator (ESI) rose to 106.9, from 104.3 in the third quarter (see Chart 5). Consequently, both the ESI and the PMI remain above their respective long-term averages.
Looking ahead, the economic expansion is expected to firm further. The pass-through of the monetary policy measures is supporting domestic demand and facilitating the ongoing deleveraging process. The very favourable financing conditions and improvements in corporate profitability continue to promote the recovery in investment. Moreover, sustained employment gains, which are also benefiting from past structural reforms, provide support for private consumption via increases in households’ real disposable income. At the same time, there are signs of a somewhat stronger global recovery. However, economic growth in the euro area is expected to be dampened by a sluggish pace of implementation of structural reforms and remaining balance sheet adjustments in a number of sectors. The risks surrounding the euro area growth outlook remain tilted to the downside and relate predominantly to global factors. The results of the latest round of the ECB’s Survey of Professional Forecasters, conducted in early January, show that private sector GDP growth forecasts were revised only modestly in comparison with the previous round of early October, pointing to growth at around 1.5% over the period 2017 to 2019.
Headline inflation increased markedly in December 2016. HICP inflation rose to 1.1% in December from 0.6% in November (see Chart 7). This increase was driven in particular by much higher energy price inflation, which continued to play a dominant role in the recovery of headline inflation since the low of -0.2% in April 2016. A large part of the higher energy price inflation can be explained by sizeable upward base effects, which will also affect inflation in early 2017 (see Box 4).
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2011 2012 2013 2014 2015 2016 HICP food energy non - energy industrial goods services
Underlying inflation showed no signs of a convincing upward trend. The annual rate of HICP inflation excluding food and energy was 0.9% in December, following 0.8% for the four months to November. Available data at the national level suggest that the December uptick was largely the result of an upsurge in the volatile travel-related component. HICP inflation excluding food and energy remains well below its long-term average of 1.5%. Furthermore, alternative measures do not indicate a pick-up in underlying inflationary pressures. This may reflect in part the lagged downward indirect effects of past low oil prices but, more fundamentally, also continued weak domestic cost pressures.
Pipeline price pressures have remained muted. The annual rate of change in import prices for non-food consumer goods was -0.9% in November, down from ‑0.5% in October, while corresponding producer price inflation remained unchanged at 0.2% in November. So far, upward pressures associated with increases in capacity utilisation and the lagged impact of past euro exchange rate depreciation seem to have been offset by downward pressures associated with the lagged pass-through of lower commodity prices and more general global disinflationary pressures.
Wage growth in the euro area increased slightly, albeit from a low level. Annual growth in compensation per employee rose somewhat to 1.3% in the third quarter of 2016 from 1.1% in the previous quarter. Nonetheless, wage growth remains subdued by historical standards. Factors that may be weighing on wage growth include still significant slack in the labour market, weak productivity growth and the ongoing impact of labour market reforms implemented in some countries during the crisis. In addition, the low inflation environment over recent years has been contributing to lower wage growth through formal and informal indexation mechanisms.
Longer-term market-based inflation expectations increased further and the gap vis-a-vis higher survey-based measures narrowed. Since early December, market-based measures of inflation expectations have recovered further across all maturities, continuing a trend which began in the second half of 2016. The five-year forward inflation rate five years ahead increased from 1.70% in early December to 1.73% in mid-January. The rise primarily reflects an increase in the inflation risk premium. The latest round of the ECB’s Survey of Professional Forecasters (SPF), conducted in January, shows that long-term inflation expectations for the euro area remained broadly stable at around 1.8%. Inflation expectations for the near-term were revised upwards slightly (see Chart 8), which was probably driven by oil price developments (see also Box 5).