European Central Bank — Economic Bulletin (Europe, 2016)

Economic Bulletin Issue 4 / 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 Global implications of low oil prices Liquidity conditions and monetary policy operations in the period from 27 January 2016 to 26 April 2016 Low interest rates and households  net interest income Improved timeliness of the euro area quarterly GDP flash estimate: first experiences Country-specific recommendations for fiscal policies under the 2016 European Semester Articles 1 The role of euro area non-monetary financial institutions in financial intermediation 2 The euro area fiscal stance Statistics 2 2 5 10 14 18 22 27 29 33 38 41 45 49 68 S 1 ECB Economic Bulletin, Issue 4 / 2016 1 Economic and monetary developments Overview At its monetary policy meeting on 2 June 2016, the Governing Council assessed that the comprehensive package of decisions taken in early March underpins the momentum of the euro area s economic recovery and fosters the return of inflation to levels below, but close to, 2%. The ECB s measures continue to ease the cost of credit and contribute to a strengthening in credit creation. The economic recovery in the euro area is proceeding gradually. Additional monetary stimulus, beyond the impetus already taken into account, is expected from the monetary policy measures still to be implemented, namely the corporate sector purchase programme (CSPP) and the new series of targeted longer-term refinancing operations (TLTRO II), and will contribute to further rebalancing the risks to the outlook for growth and inflation. 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. 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. Economic and monetary assessment at the time of the Governing Council meeting of 2 June 2016 Global growth remained subdued in the first quarter of 2016. Looking ahead, global activity is expected to continue to expand at a modest pace. Low interest rates, improving labour markets and growing confidence support the outlook for advanced economies. By contrast, the outlook for emerging market economies remains more uncertain as growth in China decelerates and commodity-exporting countries adjust to lower commodity prices. Between early March and early June euro area and global financial markets returned to more stable conditions. A better than expected global economic performance, a further recovery in oil prices and additional monetary stimulus in the euro area supported the valuations of risky assets. Consequently, euro area equity prices increased moderately over the review period, while the announcement of the Eurosystem s corporate sector asset purchases significantly reinforced the decline in spreads on bonds issued by non-financial corporations. Long-term euro area sovereign yields declined somewhat, closely mirroring movements in global long- term yields. In foreign exchange markets, the euro strengthened mildly. The economic recovery in the euro area is continuing. Euro area real GDP increased significantly in the first quarter of 2016. Growth continues to be supported by domestic demand, while being dampened by weak exports. The latest data point ECB Economic Bulletin, Issue 4 / 2016 2 to ongoing growth in the second quarter, though possibly at a lower rate than in the first quarter. Looking ahead, the Governing Council expects the economic recovery to proceed at a moderate but steady pace. Domestic demand remains supported by the pass-through of the monetary policy measures to the real economy. Favourable financing conditions and improvements in corporate profitability continue to promote investment. Moreover, sustained employment gains, which are also benefiting from past structural reforms, and still relatively low oil prices provide additional support for households  real disposable income and private consumption. In addition, the fiscal stance in the euro area is slightly expansionary. However, the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms. The June 2016 Eurosystem staff macroeconomic projections for the euro area foresee annual real GDP to increase by 1.6% in 2016 and 1.7% in 2017 and 2018. Compared with the March 2016 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised up for 2016 and has remained broadly unchanged for 2017 and 2018. In the Governing Council s assessment, the risks to the euro area growth outlook remain tilted to the downside, but the balance of risks has improved on the back of the monetary policy measures taken and the stimulus still in the pipeline. Downside risks continue to relate to developments in the global economy, to the upcoming British referendum on EU membership and to other geopolitical risks. According to Eurostat s flash estimate, euro area annual HICP inflation in May 2016 was -0.1%. This low level of inflation reflects past falls in energy prices. Looking ahead, on the basis of current futures prices for oil, inflation rates are likely to remain very low or negative in the next few months before picking up in the second half of 2016, in large part owing to base effects in the annual rate of change in energy prices. Supported by the ECB s monetary policy measures and the expected economic recovery, inflation rates should recover further in 2017 and 2018. The June 2016 Eurosystem staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.2% in 2016, 1.3% in 2017 and 1.6% in 2018. In comparison with the March 2016 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised slightly up for 2016, reflecting recent oil price increases, and has remained unchanged for 2017 and 2018. The monetary policy measures in place since June 2014 have clearly improved credit flows across the euro area. Broad money growth decreased somewhat in April, but remained robust. Loan growth continued to recover gradually. Domestic sources of money creation were again the main driver of broad money growth. Low interest rates, as well as the effects of the ECB s targeted longer-term refinancing operations (TLTROs) and the expanded asset purchase programme (APP), continue to support money and credit dynamics. Banks have been passing on their favourable funding conditions in the form of lower lending rates, and the recovery in loan growth is still drawing strength from improved lending conditions. The total annual flow of ECB Economic Bulletin, Issue 4 / 2016 3 external financing to non-financial corporations is estimated to have increased moderately in the first quarter of 2016. Overall, the monetary policy measures in place since June 2014 have improved borrowing conditions for firms and households substantially and the comprehensive package of new monetary policy measures adopted in March this year underpins the ongoing upturn in loan growth, thereby supporting the recovery of the real economy. Monetary policy decisions The Governing Council assessed that a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need to preserve an appropriate degree of monetary accommodation in order to secure a return of inflation rates towards levels that are below, but close to, 2% without undue delay. The Governing Council decided to keep the key ECB interest rates unchanged and continued to expect these rates to remain at present or lower levels for an extended period of time, and well past the horizon of the Eurosystem s net asset purchases. Regarding non- standard monetary policy measures, the Governing Council confirmed that the monthly asset purchases of  80 billion 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. On 8 June the Eurosystem started making purchases under the CSPP. Moreover, on 22 June the Eurosystem will conduct the first operation of TLTRO II. ECB Economic Bulletin, Issue 4 / 2016 4 1 External environment The subdued global growth recorded towards the end of last year persisted into the first quarter of 2016. Looking ahead, global activity is expected to continue to expand at a moderate pace. Low interest rates, improving labour market conditions and growing confidence support the outlook for advanced economies. By contrast, the outlook for emerging market economies remains more uncertain as growth in China decelerates and commodity-exporting countries adjust to lower commodity prices. Global economic activity and trade The global economy continues to expand at a moderate pace. Activity indicators have stabilised, suggesting a continued steady trajectory for the global economy. In financial markets, sentiment has rebounded. Nonetheless, uncertainties continue to cloud the horizon as countries navigate the effects of a number of developments currently shaping the international environment, such as low commodity prices adversely impacting commodity exporters; the tightening of financial conditions, mostly in emerging market economies, partly associated with the normalisation of US monetary policy; the gradual r