European Central Bank — Economic Bulletin (Europe, 2016)

Economic Bulletin Issue 3 / 2016 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 Harmonised Index of Consumer Prices   Easter effects and improved seasonal adjustment Recent wage trends in the euro area The second series of targeted longer-term refinancing operations (TLTRO II) 4 Rebalancing in euro area portfolio investment flows Articles 1 The slowdown in emerging market economies and its implications for the global economy 2 Government debt reduction strategies in the euro area Statistics 3 5 8 9 11 13 17 21 24 29 31 46 S 1 ECB Economic Bulletin, Issue 3 / 2016   Update on economic and monetary developments 2 Update on economic and monetary developments Summary The financial market turbulence of early 2016 has subsided and global economic activity is showing signs of stabilisation. World trade has been resilient at the start of the year, although its growth rate is expected to remain moderate. Risks to the outlook for global activity, most prominently for emerging market economies, remain on the downside and relate in particular to policy uncertainty, financial turbulence and geopolitical risks. Global headline inflation has remained at low levels as past energy price declines continue to weigh on price increases. Euro area sovereign bond yields have declined along with their counterparts in the United States. Corporate bond spreads have tightened substantially amid a stabilisation in market volatility and following the announcement of the ECB s corporate sector purchase programme. Reduced volatility has provided further support for global equity prices, while the effective exchange rate of the euro has appreciated. The economic recovery in the euro area is continuing, driven by domestic demand, while foreign demand growth remains weak. Domestic demand continues to be supported by monetary policy measures. Their favourable impact on financing conditions, together with improvements in corporate profitability, is benefiting investment. Moreover, the accommodative monetary policy stance, continued employment gains resulting from past structural reforms and the still relatively low price of oil should provide ongoing support for households  real disposable income and private consumption. In addition, the fiscal stance in the euro area is slightly expansionary. At the same time, the economic recovery in the euro area is still dampened by the ongoing balance sheet adjustments in a number of sectors, the insufficient pace of implementation of structural reforms in some countries and subdued growth prospects in emerging markets. The risks to the euro area growth outlook remain tilted to the downside. Euro area headline inflation has remained at levels around zero in recent months. The low level of inflation continues to reflect mainly the impact of strongly negative annual rates of change in energy prices. At the same time, most measures of underlying inflation do not show a clear upward trend. Domestic price pressures remain subdued. Market-based measures of long-term inflation expectations have stabilised at low levels and remain substantially below readings from survey-based expectation measures. Looking ahead, on the basis of current futures prices for energy, inflation rates are likely to be negative in the coming months before picking up during the second half of 2016, owing in large part to base effects. Thereafter, inflation rates are expected to recover further in 2017 and 2018, supported by the ECB s monetary policy measures and the economic recovery. ECB Economic Bulletin, Issue 3 / 2016   Update on economic and monetary developments 3 Following the comprehensive package of monetary policy measures adopted in early March, broad financing conditions in the euro area have improved. The pass-through of the monetary policy stimulus to firms and households, notably through the banking system, is strengthening. Money growth has remained solid, while loan growth is continuing its gradual recovery. Domestic sources of money creation are still the main driver of broad money growth. Low interest rates, the targeted longer-term refinancing operations and the expanded asset purchase programme are supporting improvements in money and credit dynamics. Banks  funding costs have declined further, with banks passing on their more favourable funding conditions to lower lending rates. Overall, the monetary policy measures in place since June 2014 have clearly improved borrowing conditions for firms and households, as well as credit flows across the euro area. The monetary policy measures adopted in March 2016 underpin the ongoing upturn in loan growth, thereby supporting the recovery of the real economy. At its meeting on 21 April 2016, 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, as decided on 10 March 2016, the ECB has started to expand the monthly purchases under the asset purchase programme to  80 billion, from the previous amount of  60 billion. As stated before, these purchases 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 inflation aim. Moreover, in June the ECB will conduct the first operation of the new series of targeted longer-term refinancing operations (TLTRO II) and will commence purchases under the corporate sector purchase programme. Looking ahead, it is essential to preserve an appropriate degree of monetary accommodation as long as needed in order to underpin the momentum of the euro area s economic recovery and in order to accelerate the return of inflation to levels below, but close to, 2%. The Governing Council will continue to monitor closely the evolution of the outlook for price stability and, if warranted to achieve its objective, will act by using all the instruments available within its mandate. In the current context, it is crucial to ensure that the very low inflation environment does not become entrenched in second-round effects on wage and price setting. ECB Economic Bulletin, Issue 3 / 2016   Update on economic and monetary developments 4 1 External environment Recent survey-based indicators suggest that global economic activity stabilised during the first quarter of 2016. The turbulence in financial markets observed at the beginning of the year has now subsided, as heightened concerns about the global economy have gradually diminished. Indeed, stock markets have recovered all of the losses suffered since the start of the year, volatility has declined and commodity prices have also rebounded somewhat. This has helped to ease financial conditions in many emerging market economies (EMEs), which have seen capital flows return amid an improved global appetite for risk. Chart 1 Global composite output PMI (diffusion index, 50 = no change) 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) 60 55 50 45 2010 2011 2012 2013 2014 2015 2016 Sources: Markit and ECB staff calculations. Note: The latest observation is for March 2016. The global composite output Purchasing Managers' Index (PMI) increased slightly in March relative to February, pointing to some improvement in global activity. This followed a number of rather weak readings during the previous months (see Chart 1) and reflects a modest pick-up in activity in both the services and manufacturing sectors. However, in quarterly terms the global output PMI for the first quarter of 2016 was still lower than that of the previous quarter, remaining below its long-term average. This decline was largely due to developments in advanced economies, particularly in the United States, while the composite output PMI improved somewhat among EMEs. Overall, the PMI data suggest some deceleration in growth among advanced economies and continued modest growth in EMEs in the first quarter of 2016. Global trade has shown resilience. Global merchandise trade sustained its momentum in January, 70 60 50 40 following a strong upward revision to the December data. In January the volume of world imports of goods grew by 1.2% in three-month on three-month terms, following growth of 1.5% in December. This upward revision was driven by more positive data for emerging Asia. In January the momentum in world imports remained resilient, supported by continued strong growth in emerging Asia and the euro area. By contrast, there was a further decline in trade in the United States and trade growth turned negative in central and eastern Europe. The global PMI for new export orders increased marginally from 49.4 to 49.6 in March, but still pointed to weak growth in global trade. Global headline inflation remained at low levels. Annual consumer price index (CPI) inflation in the OECD area declined in February, to 1.0% from 1.2% the previous month, owing to a more negative contribution from energy prices (see Chart 2). Excluding food and energy, OECD annual CPI inflation remained unchanged at 1.9% in February. ECB Economic Bulletin, Issue 3 / 2016   Update on economic and monetary developments 5 Chart 2 Consumer price inflation (year-on-year percen