European Central Bank — Economic Bulletin (Europe, 2018)

Economic Bulletin Issue 7 / 2018 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 4 5 Purchases of green bonds under the Eurosystem s asset purchase programme The geography of the euro area current account balance Investment in intangible assets in the euro area Digitalisation and its impact on the economy: insights from a survey of large companies The role of energy prices in recent inflation outcomes: a cross-country perspective Articles 1 2 Potential output in the post-crisis period The state of the housing market in the euro area Statistics 2 2 4 8 10 14 17 21 21 28 32 37 44 49 49 71 S1 ECB Economic Bulletin, Issue 7 / 2018   Contents 1 Update on economic and monetary developments Summary The incoming information that has become available since the Governing Council s monetary policy meeting in September, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. At the same time, risks relating to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent. Yet, the underlying strength of the economy continues to support the Governing Council s confidence that the sustained convergence of inflation to its aim will continue in the period ahead and will be maintained even after a gradual winding-down of the net asset purchases. Nevertheless, 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. Survey indicators of global economic growth have weakened recently as the global economic cycle matures. The global trade momentum has moderated amid ongoing actions and threats regarding trade tariff increases by the United States and possible retaliation by affected countries, but the near-term outlook remains steady. Global financial conditions remain supportive for advanced economies, while creating headwinds for emerging market economies. In the euro area, sovereign bond yields have risen amid an increase in global risk-free rates and rising tensions in the sovereign debt markets of some euro area countries. Euro area equity prices have declined, reflecting a deterioration in risk sentiment. By contrast, yield spreads on corporate bonds have remained broadly unchanged. In foreign exchange markets, the euro has been broadly stable in trade-weighted terms. Euro area real GDP increased by 0.4%, quarter on quarter, in both the first and the second quarter of 2018. Looking ahead, the incoming information remains overall consistent with the Governing Council s baseline scenario of an ongoing broad-based economic expansion. However, some recent sector-specific developments are having an impact on the near-term growth profile. The ECB s monetary policy measures continue to underpin domestic demand. Private consumption is fostered by ongoing employment growth and rising wages. Business investment is supported by solid domestic demand, favourable financing conditions and corporate profitability. Housing ECB Economic Bulletin, Issue 7 / 2018   Update on economic and monetary developments Summary 2 investment remains robust. In addition, the expansion in global activity is expected to continue supporting euro area exports, though at a slower pace. Euro area annual HICP inflation increased to 2.1% in September 2018, from 2.0% in August, reflecting mainly higher energy and food price inflation. On the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around the current level over the coming months. 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. Looking ahead, underlying inflation is expected to pick up towards the end of the year and to increase further over the medium term, supported by the ECB s monetary policy measures, the ongoing economic expansion and rising wage growth. The monetary analysis shows that broad money (M3) growth stood at 3.5% in September 2018, after 3.4% in August. The growth of loans to the private sector has strengthened further, continuing the upward trend observed since the beginning of 2014. The euro area bank lending survey for the third quarter of 2018 indicates that loan growth continues to be supported by increasing demand across all loan categories and favourable bank lending conditions for loans to enterprises and loans for house purchase. Combining the outcome of the economic analysis with the signals coming from the monetary analysis, the Governing Council concluded that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. On the basis of this assessment, 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. Regarding non-standard monetary policy measures, the Governing Council confirmed that the Eurosystem will continue to make net purchases under the asset purchase programme (APP) at the new monthly pace of  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. 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 7 / 2018   Update on economic and monetary developments Summary 3 1 External environment Global survey indicators of economic growth have weakened recently as the global economic cycle matures. The global composite output Purchasing Managers  Index (PMI) excluding the euro area declined further below its long-term average in September (see Chart 1), reaching a two-year low. The decline was driven by both the manufacturing and the services components. In quarterly terms, the average PMI for the third quarter of 2018 declined from its level in the previous quarter. The composite output PMI decreased across most advanced economies, including the United States, Japan and the United Kingdom. In emerging market economies, it increased in India but weakened in China, Russia and Brazil, the latter country index remaining below the expansionary threshold. Chart 1 Global composite output PMI (diffusion index) Global excluding the euro area Global excluding the euro area   long-term average Advanced economies excluding the euro area Emerging market economies 58 56 54 52 50 48 2011 2012 2013 2014 2015 2016 2017 2018 Sources: Haver Analytics, Markit and ECB calculations. Notes: The latest observations are for September 2018.  Long-term average  refers to the period from January 1999 to September 2018. Risks to the global economy remain to the downside, amid ongoing actions and threats regarding trade tariff increases by the United States and possible retaliation by the affected countries. The US administration implemented tariffs targeting an additional USD 200 billion of Chinese imports with effect from 24 September 2018, and China retaliated with tariffs targeting an additional USD 60 billion of exports from the United States. Given the size of these latest measures, uncertainty as to their impact has increased, in particular as regards business sentiment and capital spending plans. Policy uncertainty also remains high. While the United States is weighing additional tariffs on Chinese exports and an expansion of protectionist measures in the automotive sector, a new trade agreement between the United States, Mexico and Canada (USMCA) signals an easing of trade tensions. Overall, the risks to global growth from rising protectionism remain significant. Global financial conditions remain supportive for advanced economies, while creating headwinds for emerging market economies. Overall, monetary policy in advanced economies remains accommodative. At the same time, in the United States ECB Economic Bulletin, Issue 7 / 2018   Update on economic and monetary developments External environment 4 the Federal Open Market Committee increased policy rates in September amid solid growth, rising inflation and a tight labour market. Following the decisi