European Central Bank — Economic Bulletin (Europe, 2024)

Economic Bulletin Issue 7 / 2024 Contents Economic, financial and monetary developments Summary External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments 1 2 3 4 5 Boxes 1 2 3 4 5 6 7 8 Geopolitical fragmentation in global and euro area greenfield foreign direct investment The link between oil prices and the US dollar: evidence and economic implications The impact of special-purpose entities on euro area cross- border financial linkages Main findings from the ECB s recent contacts with non-financial companies What consumers think is the main driver of recent inflation: changes in perceptions over time The performance of Eurosystem/ECB staff projections for economic growth since the COVID-19 pandemic Decoding revisions in policy rate expectations: insights from the Survey of Monetary Analysts Euro area fiscal position in 2024 Articles 1 The ECB s accountability to the European Parliament 2019- 2024: commitment in times of change Box 1 The digital euro: a case study on intensifying parliamentary communication and engagement Box 2 ECB accountability in banking supervision ECB Economic Bulletin, Issue 7 / 2024   Contents 3 3 7 11 18 24 30 37 37 42 48 53 58 62 67 71 75 75 80 88 1 2 The Survey on the Access to Finance of Enterprises: monetary policy, economic and financing conditions and inflation expectations Box 1 Linking financial market data and SAFE-based indicators of firms  financing gaps Statistics 93 100 S1 ECB Economic Bulletin, Issue 7 / 2024   Contents 2 Economic, financial and monetary developments Summary At its meeting on 17 October 2024, the Governing Council decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate   the rate through which the Governing Council steers the monetary policy stance   was based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The incoming information on inflation showed that the disinflationary process is well on track. The inflation outlook was also affected by recent downside surprises in indicators of economic activity. Meanwhile, financing conditions remained restrictive. Inflation is expected to rise in the coming months, before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path. Economic activity The incoming information suggests that economic activity has been somewhat weaker than expected. While industrial production has been particularly volatile over the summer months, surveys indicate that manufacturing has continued to contract. For services, surveys show an uptick in August, likely supported by a strong summer tourism season, but the latest data point to more sluggish growth. Businesses are expanding their investment only slowly, while housing investment is continuing to fall. Exports have weakened, especially for goods. ECB Economic Bulletin, Issue 7 / 2024   Economic, financial and monetary developments Summary 3 Although incomes rose in the second quarter, households consumed less, contrary to expectations.1 The saving rate stood at 15.7% in the second quarter, well above the pre-pandemic average of 12.9%. At the same time, recent survey evidence points to a gradual recovery in household spending. The labour market remains resilient. The unemployment rate stayed at its historical low of 6.4% in August. However, surveys point to slowing employment growth and a further moderation in the demand for labour. The Governing Council expects the economy to strengthen over time, as rising real incomes allow households to consume more. The gradually fading effects of restrictive monetary policy should support consumption and investment. Exports should contribute to the recovery as global demand rises. Fiscal and structural policies should be aimed at making the economy more productive, competitive and resilient. That would help to raise potential growth and reduce price pressures in the medium term. To this end, it is crucial to swiftly follow up, with concrete and ambitious structural policies, on Mario Draghi's proposals for enhancing European competitiveness and Enrico Letta s proposals for empowering the Single Market. Implementing the EU s revised economic governance framework fully, transparently and without delay will help governments bring down budget deficits and debt ratios on a sustained basis. Governments should now make a strong start in this direction in their medium-term plans for fiscal and structural policies. Inflation Annual inflation fell further to 1.7% in September, its lowest level since April 2021. Energy prices dropped sharply, at an annual rate of -6.1%. Food price inflation went up slightly, to 2.4%. Goods inflation remained subdued, at 0.4%, while services inflation edged down to 3.9%. Most measures of underlying inflation either declined or were unchanged. Domestic inflation is still elevated, as wage pressures in the euro area remain strong. Negotiated wage growth will remain high and volatile for the rest of the year, given the significant role of one-off payments and the staggered nature of wage adjustments. Inflation is expected to rise in the coming months, partly because previous sharp falls in energy prices will drop out of the annual rates. Inflation should then decline to target in the course of next year. The disinflation process should be supported by easing labour cost pressures and the past monetary policy tightening gradually feeding through to consumer prices. Most measures of longer-term inflation expectations stand at around 2%. 1 The cut-off date for data included in this issue of the Economic Bulletin was 16 October 2024, except for HICP data, which had a cut-off date of 17 October. According to Eurostat s updated estimate of euro area national accounts, which was released on 18 October, private consumption growth for the second quarter of 2024 was revised upwards and is now positive (0.1%). ECB Economic Bulletin, Issue 7 / 2024   Economic, financial and monetary developments Summary 4 Risk assessment The risks to economic growth remain tilted to the downside. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by sources of geopolitical risk, such as Russia s unjustified war against Ukraine and the tragic conflict in the Middle East, which could also disrupt energy supplies and global trade. Lower demand for euro area exports due, for instance, to a weaker world economy or an escalation in trade tensions between major economies would further weigh on euro area growth. Growth could also be lower if the lagged effects of monetary policy tightening turn out stronger than expected. Growth could be higher if the world economy grows more strongly than expected or if easier financing conditions and declining inflation lead to a faster rebound in consumption and investment. Inflation could turn out higher than anticipated if wages or profits increase by more than expected. Upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade. Moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices. By contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, monetary policy dampens demand more than expected, or the economic environment in the rest of the world worsens unexpectedly. Financial and monetary conditions Shorter-term market interest rates have declined since the Governing Council meeting on 12 September, owing mainly to weaker news on the euro area economy and the further fall in inflation. While financing conditions remain restrictive, the average interest rates on new loans to firms and on new mortgages decreased slightly in August, to 5.0% and 3.7% respectively. Credit standards for business loans were unchanged in the third quarter, as reported in the October 2024 bank lending survey, after more than two years of progressive tightening. Moreover, demand for loans by firms rose for the first time in two years. Overall lending to firms continues to be subdued, growing at an annual rate of 0.8% in August. Credit standards for mortgages eased for the third quarter in a row, owing especially to greater competition among banks. Lower interest rates and better housing market prospects led to a strong increase in the demand for mortgages. In line with this, mortgage lending picked up slightly, growing at an annual rate of 0.6%. ECB Economic Bulle