European Central Bank — Economic Bulletin (Europe, 2016)

Economic Bulletin Issue 8 / 2016 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 5 Impact of the November 2016 OPEC agreement on the oil market Liquidity conditions and monetary policy operations in the period from 27 July to 25 October 2016 Structural indicators of the euro area business environment Assessing the impact of housing costs on HICP inflation Review of draft budgetary plans for 2017 and the budgetary situation for the euro area as a whole Articles 1 2 The impact of uncertainty on activity in the euro area Looking back at OTC derivative reforms   objectives, progress and gaps Statistics 2 2 5 11 15 20 25 31 34 34 37 42 47 51 55 55 75 S1 ECB Economic Bulletin, Issue 8 / 2016 1 Economic and monetary developments Overview At its monetary policy meeting on 8 December 2016, based on the regular economic and monetary analyses, the Governing Council conducted a comprehensive assessment of the economic and inflation outlook and the monetary policy stance. The assessment confirmed the need to extend the asset purchase programme beyond March 2017 to preserve the very substantial amount of monetary support that is necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. Economic and monetary assessment at the time of the Governing Council meeting of 8 December 2016 Global activity has improved in the second half of the year and is expected to continue strengthening, although remaining below its pre-crisis pace. Continued accommodative policies and improving labour markets have supported activity in the United States, but uncertainty about the US and global outlook has increased since the US election. In Japan the pace of expansion is expected to remain moderate, while the medium-term growth prospects of the United Kingdom are likely to be restrained by heightened uncertainty related to the country s future relations with the EU. Moreover, while the ongoing gradual deceleration of Chinese growth is likely to weigh on other emerging market economies, the gradual easing of deep recessions in some of the larger commodity-exporting countries is increasingly supporting global growth. Oil prices have risen following the OPEC agreement of 30 November and the effects of past oil price declines on global headline inflation are slowly diminishing. However, the still abundant global spare capacity is restraining underlying inflation. Euro area sovereign yields have risen recently and the EONIA forward curve has steepened. The increase in nominal yields that has taken place since early October in part reflects the global upward trend in longer-term interest rates, which was most pronounced in the United States. The increase in nominal yields translated into a rise in the level and steepness of the EONIA forward curve. Corporate bond spreads increased slightly, but remained lower than in early March 2016, when the Eurosystem s corporate sector purchase programme started. While broad equity prices rose marginally in the euro area, bank equity outperformed the broad index. The economic recovery in the euro area is continuing. Euro area real GDP increased by 0.3%, quarter on quarter, in the third quarter of 2016, following similar growth in the second quarter. Incoming data, notably survey results, point to a continuation of the growth trend in the fourth quarter of 2016. ECB Economic Bulletin, Issue 8 / 2016   Economic and monetary developments Overview 2 Looking further ahead, the Governing Council expects the economic expansion to proceed at a moderate but firming pace. The pass-through of the ECB s monetary policy measures to the real economy is supporting domestic demand and has facilitated deleveraging. Improvements in corporate profitability and very favourable financing conditions continue to promote a recovery in investment. Moreover, sustained employment gains, which are also benefiting from past structural reforms, provide support for households  real disposable income and private consumption. At the same time, there are indications 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 December 2016 Eurosystem staff macroeconomic projections for the euro area foresee annual real GDP increasing by 1.7% in 2016 and 2017, and by 1.6% in 2018 and 2019. Compared with the September 2016 ECB staff macroeconomic projections, the outlook for real GDP growth is broadly unchanged. The risks surrounding the euro area growth outlook remain tilted to the downside. According to Eurostat s flash estimate, euro area annual HICP inflation in November 2016 was 0.6%, up further from 0.5% in October and 0.4% in September. This reflected to a large extent an 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 rates are likely to pick up significantly further at the turn of the year, to rates above 1%, mainly owing to base effects in the annual rate of change of energy prices. Supported by the ECB s monetary policy measures, the expected economic recovery and the corresponding gradual absorption of slack, inflation rates should increase further in 2018 and 2019. The December 2016 Eurosystem staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.2% in 2016, 1.3% in 2017, 1.5% in 2018 and 1.7% in 2019. By comparison with the September 2016 ECB staff macroeconomic projections, the outlook for headline HICP inflation is broadly unchanged. Low interest rates and the effects of the ECB s non-standard monetary policy measures continue to support money and credit dynamics. Broad money growth remained stable in the third quarter of 2016 but declined somewhat in October. At the same time, loan growth to the private sector increased in October. Domestic sources of money creation remained the main driver of broad money growth. The effects of the ECB s monetary policy measures continue to support growth in money and credit. Banks have been passing on their favourable funding conditions, leading to lower lending rates and improved credit supply, thereby contributing to the gradual recovery in loan dynamics. The annual flow of total external financing to non- financial corporations is estimated to have continued to strengthen in the third quarter of 2016. ECB Economic Bulletin, Issue 8 / 2016   Economic and monetary developments Overview 3 Monetary policy decisions In the pursuit its price stability objective, the Governing Council took the following decisions:       As regards non-standard monetary policy measures, the Eurosystem will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of  80 billion until the end of March 2017. 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. If, in the meantime, the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP. To ensure the continued smooth implementation of the Eurosystem s asset purchases, the Governing Council decided to adjust the parameters of the APP as of January 2017 as follows. First, the maturity range of the public sector purchase programme will be broadened by decreasing the minimum remaining maturity for eligible securities from two years to one year. Second, purchases of securities under the APP with a yield to maturity below the interest rate on the ECB s deposit facility will be permitted to the extent necessary. The key ECB interest rates were kept unchanged and the Governing Council continues to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of net asset purchases. The extension of the APP has been calibrated to preserve the very substantial degree of monetary accommodation necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. Together with the sizeable volume of past purchases and forthcoming reinvestments, it ensures that financial conditions in the euro area will remain very favourable, which continues to be crucial to achieve the ECB s objective. In particular, the extension of Eurosystem purchases over a longer horizon allows for a more sustained market presence and, therefore, a more lasting transmission of the ECB s stimulus measures. This calibration reflects the moderate but firming recovery of the euro area economy and still subdued underlying inflationary pressures. The Governing Council will closely monitor 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. ECB Economic Bulletin, Issue 8 / 2016   Economic and monetary developments Overview 4 1 External environment Global activity has improved in the sec