European Central Bank — Economic Bulletin (Europe, 2021)

Economic Bulletin Issue 1 / 2021 Contents Update on economic and monetary developments Summary 1 2 3 4 5 External environment Financial developments Economic activity Prices and costs Money and credit Boxes 1 2 3 4 5 6 Pandemic-induced constraints and inflation in advanced economies Rotation towards normality   the impact of COVID-19 vaccine-related news on global financial markets The economic impact of the pandemic   drivers of regional differences Model-based risk analysis during the pandemic: introducing ECB-BASIR Housing costs and homeownership in the euro area Prices for travel during the COVID-19 pandemic: is there commonality across countries and items? Articles 1 2 3 The ECB s dialogue with non-financial companies The role of demand and supply factors in HICP inflation during the COVID-19 pandemic   a disaggregated perspective The initial fiscal policy responses of euro area countries to the COVID-19 crisis Statistics 2 2 6 9 12 17 20 25 25 30 35 38 43 48 54 54 62 80 S1 ECB Economic Bulletin, Issue 1 / 2021   Contents 1 Update on economic and monetary developments Summary The start of vaccination campaigns across the euro area is an important milestone in the resolution of the ongoing health crisis. Nonetheless, the pandemic continues to pose serious risks to public health and to the euro area and global economies. The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity. Activity in the manufacturing sector continues to hold up well, but services sector activity is being severely curbed, albeit to a lesser degree than during the first wave of the pandemic in early 2020. Output is likely to have contracted in the fourth quarter of 2020 and the intensification of the pandemic poses some downside risks to the short-term economic outlook. Inflation remains very low in the context of weak demand and significant slack in labour and product markets. Overall, the incoming data confirm the Governing Council s previous baseline assessment of a pronounced near-term impact of the pandemic on the economy and a protracted weakness in inflation. In this environment ample monetary stimulus remains essential to preserve favourable financing conditions over the pandemic period for all sectors of the economy. By helping to reduce uncertainty and bolster confidence, this will encourage consumer spending and business investment, underpinning economic activity and safeguarding medium-term price stability. Meanwhile, uncertainty remains high, including relating to the dynamics of the pandemic and the speed of vaccination campaigns. The Governing Council will continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook. The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry. The global economic recovery continued at the end of 2020, amid increasing headwinds from the resurgence of the pandemic. Economic activity in both the manufacturing and services sectors remains robust, although extended lockdowns in the countries more adversely affected by the pandemic increasingly pose downside risks. The recovery in global trade is ongoing, despite some signs of a loss in momentum towards the end of 2020. Global financial conditions remain highly accommodative, with equity markets being buoyed by COVID-19 vaccine-related developments, expansive fiscal policies and lower uncertainty regarding future trade relations between the European Union and the United Kingdom. Over the review period (10 December 2020 to 20 January 2021) the forward curve of the euro overnight index average (EONIA) shifted upwards and flattened, which effectively removed most of its prior inversion. In general, risk sentiment improved and ECB Economic Bulletin, Issue 1 / 2021   Update on economic and monetary developments Summary 2 global market-based inflation expectations increased on the back of developments in the United States. Consequently, the euro area risk-free curve does not suggest firm market expectations of an imminent rate cut. At the same time, long-term sovereign bond yields in the euro area increased somewhat, but remained at very subdued levels overall. Risk assets performed well, with equity prices increasing on both sides of the Atlantic. US equities outperformed their euro area counterparts and reached new record highs. In foreign exchange markets, the euro depreciated slightly in trade-weighted terms. Following the unprecedented fall in euro area output in the first half of 2020, economic growth rebounded strongly in the third quarter of the year. However, incoming economic data, surveys and high-frequency indicators suggest that the resurgence of the pandemic and the associated intensification of containment measures have likely led to a decline in activity in the fourth quarter of 2020 and are also expected to weigh on activity in the first quarter of this year. This profile is broadly in line with the baseline scenario of the December 2020 macroeconomic projections. Whereas services sector activity is being severely curtailed by the intensification of containment measures (albeit to a lesser extent than in the first wave of the pandemic in spring 2020), manufacturing activity is continuing to hold up well. While growth in the fourth quarter will be weak and very possibly negative, the relative resilience of the industrial sector suggests that there could be some upside risks to growth. Growth patterns in the euro area are expected to remain uneven, both across sectors and across countries. Looking ahead, the roll-out of vaccines, which started in late December, allows for greater confidence in the resolution of the health crisis. However, it will take time until widespread immunity is achieved, and further adverse developments related to the pandemic, with challenges for public health and economic prospects, cannot be ruled out. Over the medium term, the economic recovery in the euro area should be supported by favourable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are lifted and uncertainty recedes. Euro area annual HICP inflation remained unchanged for the fourth month in a row, standing at -0.3% in December. Headline inflation is expected to move into positive territory in early 2021 owing to the end of the temporary VAT reduction in Germany, upward base effects in energy price inflation and the impact of recent oil price increases. However, underlying price pressures will remain subdued owing to weak demand, notably in the tourism and travel-related sectors, as well as to low wage pressures and the appreciation of the euro exchange rate. Once the impact of the pandemic fades, a recovery in demand, supported by accommodative monetary and fiscal policies, will put upward pressure on inflation over the medium term. Survey-based measures and market-based indicators of longer-term inflation expectations remain at low levels, although market-based indicators of inflation expectations have increased slightly. In November 2020, monetary dynamics in the euro area continued to reflect the impact of the coronavirus crisis. Broad money growth increased further, while growth in loans to the private sector remained stable, with moderate lending to non-financial corporations and resilient lending to households. Strong money growth continued to be supported by the ongoing asset purchases by the Eurosystem, which remain the ECB Economic Bulletin, Issue 1 / 2021   Update on economic and monetary developments Summary 3 largest source of money creation. The tightening of credit standards for loans to firms and to households continued in the fourth quarter of 2020 in the context of renewed COVID-19-related restrictions. Favourable lending rates have continued to support euro area economic growth. Against this background, the Governing Council decided to reconfirm its very accommodative monetary policy stance. First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. Second, the Governing Council will continue the purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of  1,850 billion. The Governing Council will conduct net asset purchases under the PEPP until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over. The purchases under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation. The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future