European Central Bank — Economic Bulletin (Europe, 2017)

Economic Bulletin Issue 7 / 2017 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 Does trade play a role in helping to explain productivity growth? The recalibration of the ECB s asset purchase programme Recent trends in consumer credit in the euro area Article 1 China s economic growth and rebalancing and the implications for the global and euro area economies Statistics 2 2 4 7 10 14 17 21 21 25 28 32 32 S1 ECB Economic Bulletin, Issue 7 / 2017 1 Update on economic and monetary developments Summary The solid and broad-based economic expansion in the euro area is continuing; the latest data and survey results point to unabated growth momentum in the second half of this year. The ECB s monetary policy measures continue to support domestic demand, which is a precondition for further progress towards a sustained adjustment in the path of inflation towards levels below, but close to, 2% over the medium term. Private consumption is underpinned by rising employment, which is also benefiting from past labour market reforms, and by increasing household wealth. The upswing in business investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Construction investment has also strengthened. Risks surrounding the euro area growth outlook remain broadly balanced. On the one hand, the strong cyclical momentum, as evidenced in recent developments in sentiment indicators, could lead to further positive growth surprises. On the other hand, downside risks continue to relate primarily to global factors and developments in foreign exchange markets. At the global level, growth has also broadened across countries and survey-based indicators point to sustained momentum. Global trade growth strengthened in July, after a moderation in the second quarter of 2017, and remained robust in August, mainly driven by the advanced economies. Leading indicators continue to signal positive prospects for trade growth in the short term. Euro area annual HICP inflation was 1.5% in September, unchanged from August. Underlying inflation measures have ticked up moderately since early 2017, but have yet to show more convincing signs of a sustained upward trend. Wage growth has increased somewhat, but domestic cost pressures still remain subdued overall. Global headline inflation also picked up in August, mainly due to increases in energy and food prices. Underlying inflation in the euro area is expected to continue to rise gradually over the medium term, supported by the ECB s monetary policy measures, the continuing economic expansion, the corresponding gradual absorption of economic slack and rising wage growth. Looking ahead, on the basis of current futures prices for oil, headline inflation is likely to temporarily decline towards the turn of the year, mainly reflecting base effects in energy prices. Broad money growth has remained robust, and the gradual recovery in loan growth is proceeding. Domestic counterparts of broad money, associated with Eurosystem purchases under the asset purchase programme (APP) and the gradual recovery in the growth of credit to the private sector, were the main drivers of broad money growth. The latest euro area bank lending survey shows that loan growth continues to be supported by increasing loan demand by enterprises and households, and the easing of credit standards for loans to households. Financing costs for euro area ECB Economic Bulletin, Issue 7 / 2017   Update on economic and monetary developments Summary 2 non-financial corporations (NFCs) have remained favourable, with bank lending rates for NFCs close to their historical lows. Financial markets reflect the firmer euro area economic outlook and global developments. Euro area government bond yields have risen and the EONIA forward curve has steepened since early September. The improved economic outlook and some easing of geopolitical concerns have driven indices of equity prices higher, while corporate debt spreads have tightened. The trade-weighted value of the euro is unchanged overall, despite some bilateral depreciation against the US dollar and the pound sterling. At its monetary policy meeting on 26 October 2017, the Governing Council took the following decisions in pursuit of its price stability objective.         First, the key ECB interest rates were kept unchanged and the Governing Council continues to expect them to remain at their present levels for an extended period of time, and well past the horizon of net asset purchases. Second, as regards non-standard monetary policy measures, the Eurosystem will continue to make purchases under the APP at the current monthly pace of  60 billion until the end of December 2017. From January 2018 net asset purchases are intended to continue at a monthly pace of  30 billion until the end of September 2018, 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 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 APP in terms of size and/or duration. Third, the Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance. Fourth, the Governing Council also decided to continue to conduct the main refinancing operations and three-month longer-term refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2019. The Governing Council took these decisions to preserve the very favourable financing conditions that are still needed for a sustained return of inflation rates towards levels that are below, but close to, 2%. While the recalibration of the asset purchases reflects growing confidence in the gradual convergence of inflation towards the inflation aim, domestic price pressures are still muted overall, and the economic outlook and the path of inflation remain conditional on continued support from monetary policy. The Governing Council concluded that an ample degree of monetary stimulus therefore remains necessary for underlying inflation pressures to gradually build up and support headline inflation developments over the medium term. ECB Economic Bulletin, Issue 7 / 2017   Update on economic and monetary developments Summary 3 1 External environment Global growth has broadened across countries, while survey-based indicators point to sustained momentum. Since the second half of 2016, the economic recovery has shown signs of increasing synchronisation globally (see Chart 1). Moreover, survey indicators are consistent with sustained global growth. In the third quarter of 2017 the global composite output Purchasing Managers  Index (PMI) excluding the euro area remained at a level similar to those recorded in the first half of the year, close to long-term averages. Looking at the world s major advanced economies, the PMI picked up in the United States, but declined in Japan (and, to a lesser extent, the United Kingdom) relative to the second quarter. As regards emerging market economies, the quarterly PMI increased in China and rose marginally in Brazil, but declined in Russia and India (with the latter falling below the expansion threshold). Chart 1 World and advanced and emerging market economy GDP growth (year-on-year percentage changes) world advanced economies emerging market economies 10 8 6 4 2 0 -2 -4 -6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: ECB calculations. Note: The latest observation is for the second quarter of 2017. Indicators point to a recovery in global trade in the third quarter of this year. Following a moderation in the second quarter of 2017, global trade growth strengthened in July and remained robust in August, with the volume of merchandise imports increasing by a solid 1.5% in three-month-on-three-month terms in July, followed by growth of 1.3% in August (see Chart 2). The increase in those two months was driven mainly by advanced economies. Leading indicators continue to signal positive prospects in the short term. In particular, the global PMI for new export orders stood at 52.8 in the third quarter of 2017, close to the level recorded in the first half of this year and above its long-term average. ECB Economic Bulletin, Issue 7 / 2017   Update on economic and monetary developments External environment 4 Chart 2 Global trade and surveys (three-month-on-three-month percentage changes (left-hand scale); diffusion index (right-hand scale)) global merchandise imports (left-hand scale) global PMI for new export orders (right-hand scale) global PMI for manufacturing excluding euro area (right-hand scale) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 60 58 56 54 52 50 48 46 2011 2012 2013 2014 2015 2016 2017 Sources: Markit, CPB Netherlands Bureau for Economic Policy Analysis and ECB calculations. Note: The latest observations are for August 2017 for global merchandise imports and September 2017 for the PMIs. Global inflation picked up in August. After increasing slightly to stand at 2.0% in July, annual consumer price inflation in the Organisation for Economic Co-operation