European Central Bank — Economic Bulletin (Europe, 2018)

Economic Bulletin Issue 6 / 2018 Contents Economic and monetary developments Overview 1 2 3 4 5 6 External environment Financial developments Economic activity Prices and costs Money and credit Fiscal developments Boxes 1 2 3 4 Macroeconomic implications of increasing protectionism Liquidity conditions and monetary policy operations in the period from 3 May to 31 July 2018 Oil prices, the terms of trade and private consumption The fiscal impact of financial sector support measures: where do we stand a decade on from the financial crisis? Articles 1 2 3 The global financial cycle: implications for the global economy and the euro area Interpreting recent developments in market-based indicators of longer-term inflation expectations Trends and developments in the use of euro cash over the past ten years Statistics 2 2 5 11 16 20 25 32 35 35 39 44 47 52 52 73 87 S1 ECB Economic Bulletin, Issue 6 / 2018   Contents 1 Economic and monetary developments Overview At its monetary policy meeting on 13 September, the Governing Council concluded that the incoming information, including the September 2018 ECB staff projections, broadly confirms the Governing Council s previous assessment of an ongoing broad-based expansion of the euro area economy and gradually rising inflation. The underlying strength of the economy continues to support the Governing Council s confidence that the sustained convergence of inflation to its aim will proceed and will be maintained even after a gradual winding-down of the net asset purchases. At the same time, uncertainties relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently. Therefore, significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by the Governing Council s enhanced forward guidance on the key ECB interest rates. In any event, the Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards its aim in a sustained manner. Economic and monetary assessment at the time of the Governing Council meeting of 13 September 2018 While the global economy maintained a steady pace in the first half of 2018, momentum is expected to moderate. Advanced economies continue to benefit from accommodative monetary policies and the US fiscal stimulus, while activity among commodity exporters has also been bolstered by the recovery in commodity prices over the past year. However, financial conditions have tightened, particularly for some emerging markets. Moreover, global trade growth has slowed and uncertainties about future trading relations have risen. Over the medium term, global economic activity is expected to expand at a pace close to potential growth, with output gaps already closed or closing in most advanced economies. Global inflationary pressures are expected to rise slowly as spare capacity diminishes. In financial markets, euro area long-term risk-free rates have been broadly unchanged since the Governing Council s meeting in June 2018. Sovereign bond spreads have been volatile against a background of sustained political uncertainty in Italy. Although corporate earnings remain robust, equity and bond prices of euro area financial corporations have declined amid geopolitical uncertainty and rising volatility in some emerging markets. In foreign exchange markets, the euro has broadly strengthened in trade-weighted terms. ECB Economic Bulletin, Issue 6 / 2018   Economic and monetary developments Overview 2 The latest economic indicators and survey results confirm ongoing broad-based growth of the euro area economy, despite some moderation following the strong growth performance in 2017. Euro area real GDP increased by 0.4%, quarter on quarter, in the second quarter of 2018, the same rate as in the previous quarter. The ECB s monetary policy measures continue to underpin domestic demand. Private consumption is supported by ongoing employment gains, which, in turn, partly reflect past labour market reforms, and by rising wages. Business investment is fostered by the favourable financing conditions, rising corporate profitability and solid demand. Housing investment remains robust. In addition, the expansion in global activity is expected to continue, supporting euro area exports. The September 2018 ECB staff macroeconomic projections for the euro area foresee annual real GDP increasing by 2.0% in 2018, 1.8% in 2019 and 1.7% in 2020. Compared with the June 2018 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down slightly for 2018 and 2019, mainly due to a weaker contribution from foreign demand. Although risks relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently, the risks surrounding the euro area growth outlook can still be assessed as broadly balanced overall. According to Eurostat s flash estimate, euro area annual HICP inflation was 2.0% in August 2018, down from 2.1% in July. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around current levels for the remainder of the year. While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Domestic cost pressures are strengthening and broadening amid high levels of capacity utilisation and tightening labour markets, which is pushing up wage growth. Underlying inflation is expected to pick up towards the end of the year and thereafter to increase gradually over the medium term, supported by the ECB s monetary policy measures, the continuing economic expansion and rising wage growth. This assessment is also broadly reflected in the September 2018 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.7% in 2018, 2019 and 2020. The outlook for HICP inflation is unchanged compared with the June 2018 Eurosystem staff macroeconomic projections. HICP inflation excluding energy and food is projected to rise gradually from 1.1% in 2018 to 1.5% in 2019 and 1.8% in 2020. The aggregate fiscal stance for the euro area is projected to be broadly neutral in 2018, mildly expansionary in 2019, and broadly neutral again in 2020. Overall, the euro area budget deficit is expected to decline further over the projection horizon, mainly as a result of favourable cyclical conditions and declining interest payments. Although the euro area government debt-to-GDP ratio will continue to decline, it will remain elevated. Broad money (M3) growth moderated in the context of reduced monthly net asset purchases under the asset purchase programme (APP). M3 grew by 4.0% in July 2018, after 4.5% in June. Apart from some volatility in monthly flows, M3 growth is increasingly supported by bank credit creation. The narrow monetary aggregate M1 ECB Economic Bulletin, Issue 6 / 2018   Economic and monetary developments Overview 3 remained the main contributor to broad money growth. The recovery in the growth of loans to the private sector observed since the beginning of 2014 is proceeding. The annual growth rate of loans to non-financial corporations (NFCs) stood at 4.1% in July 2018, while the annual growth rate of loans to households stood at 3.0%, both unchanged from June. The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing   in particular for small and medium-sized enterprises   and credit flows across the euro area. The flow of total external financing to euro area NFCs increased considerably in the second quarter of 2018. Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council made the following decisions. First, the Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Second, the Governing Council will continue to make net purchases under the APP at the current monthly pace of  30 billion until the end of September. After September 2018, the monthly pace of the net asset purchases will be reduced to  15 billion until the end of December 2018. The Governing Council anticipates that, subject to incoming data confirming its medium-term inflation outlook, net purchases will then end. Third, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. ECB Economic Bulletin, Issue 6 / 2018   Economic and monetary developments Overview 4 1 External environment While the global economy maintained a steady pace in the first half of 2018, momentum is expected to moderate amid mounting risks and uncertainties related to rising protectionism, vulnerabilities in emerging markets and financial market volatility. Advanced economies continue to benefit from accommodative monetary policies and the US fiscal sti