European Central Bank — Economic Bulletin (Europe, 2016)

Economic Bulletin Issue 7 / 2016 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 Economic developments in the aftermath of the UK referendum on EU membership TARGET balances and the asset purchase programme Recent developments in euro area residential property prices Articles 1 2 Exchange rate pass-through into euro area inflation Business investment developments in the euro area since the crisis Statistics 2 2 4 7 9 12 14 17 17 20 24 27 27 48 S1 ECB Economic Bulletin, Issue 7 / 2016   Update on economic and monetary developments Summary 1 Update on economic and monetary developments Summary The information that has become available since early September confirmed a continued moderate but steady recovery of the euro area economy and a gradual rise in inflation, in line with previous expectations. The euro area economy has continued to show resilience to the adverse effects of global economic and political uncertainty, aided by the ECB s comprehensive monetary policy measures, which ensure very favourable financing conditions for firms and households. Overall, however, the baseline scenario remains subject to downside risks. Available global indicators point to a modest rebound in global activity and trade growth in the third quarter. At the same time, global headline inflation has remained at low levels as past energy price declines have weighed on price increases. Risks to the outlook for global activity remain on the downside and relate in particular to political uncertainty and financial imbalances. Since early September, sovereign yields have risen and the EONIA forward curve has edged upwards, with yields on intermediate maturities in particular reaching levels close to those reached after the UK referendum on EU membership in late June. Corporate bond spreads rose marginally and overall remained significantly lower than in early March 2016, when the corporate sector purchase programme was announced. Equity prices have declined marginally, with valuations in the banking sector remaining particularly depressed relative to early 2016. The economic recovery in the euro area is continuing. Looking ahead, the economic expansion is expected to proceed at a moderate but steady pace. Domestic demand should be supported by the pass-through of the ECB s monetary policy measures to the real economy. Favourable financing conditions and improvements in corporate profitability continue to promote a recovery in investment. Moreover, still relatively low oil prices and sustained employment gains, which are also benefiting from past structural reforms, provide additional support for households  real disposable income and private consumption. In addition, the fiscal stance in the euro area will be broadly neutral in 2017. However, the economic recovery in the euro area is expected to be dampened by still subdued foreign demand, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms. The risks to the euro area growth outlook remain tilted to the downside and relate mainly to the external environment. According to Eurostat, euro area annual HICP inflation in September 2016 was 0.4%, up from 0.2% in August. This reflected mainly a continued 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, inflation rates are likely to pick up over the next couple of months, in large part owing to base ECB Economic Bulletin, Issue 7 / 2016   Update on economic and monetary developments Summary 2 effects in the annual rate of change of energy prices. Supported by the ECB s monetary policy measures and the expected economic recovery, inflation rates should increase further in 2017 and 2018. The monetary policy measures put in place since June 2014 have contributed to an improvement in borrowing conditions, as well as credit flows, across the euro area, thereby supporting the economic recovery. In particular, the euro area bank lending survey for the third quarter of 2016 indicated that the ECB s asset purchase programme and the negative deposit facility rate had contributed to more favourable terms and conditions on loans. At the same time, banks have continued to report improving loan demand, amid further declines in bank lending rates that reached historical lows in August 2016. Thus the recovery in loan growth has continued at a moderate pace, despite losing some momentum over the summer period. With respect to market-based financing, the net issuance of debt securities by non- financial corporations strengthened markedly in September 2016. At its meeting on 20 October 2016, based on the regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the 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. Looking ahead, the Governing Council remains committed to preserving the very substantial degree of monetary accommodation which is necessary to secure a sustained convergence of inflation towards levels below, but close to, 2% over the medium term. To that end, the Governing Council will continue to act, if warranted, by using all the instruments available within its mandate. In December the Governing Council s assessment will benefit from the new staff macroeconomic projections extending through to 2019 and from the work of the Eurosystem committees on the options to ensure the smooth implementation of the purchase programme until March 2017, or beyond, if necessary. ECB Economic Bulletin, Issue 7 / 2016   Update on economic and monetary developments Summary 3 1 External environment Despite a modest recovery in some emerging market economies (EMEs), the global recovery remains gradual. The global composite output Purchasing Managers  Index (PMI) increased marginally further in September 2016, with a slight decline in manufacturing output being offset by a pick-up in services (see Chart 1). In quarterly terms, the global output PMI rose to 51.5 in the third quarter, up from 51.3 in the previous quarter. Mixed developments were observed in advanced economies, with the index rising in the United States and Japan in the third quarter, but declining in the United Kingdom. Growth prospects for EMEs have improved relative to the first half of the year, with surveys indicating that economic activity may have turned the corner. Chart 1 Global composite output PMI (diffusion index) global excluding euro area global excluding euro area   long-term average advanced economies excluding euro area emerging market economies 60 58 56 54 52 50 48 2010 2011 2012 2013 2014 2015 2016 Sources: Markit and ECB calculations. Note: The latest observations are for September 2016. Global financial conditions have remained favourable. EMEs have continued to benefit from improvements in risk sentiment, with capital flows to such countries proving resilient amid a broad-based improvement in financial conditions. Global risk appetite has, in part, been buoyed by central bank action in some major advanced economies. In August, the Monetary Policy Committee of the Bank of England cut interest rates and announced further quantitative easing. In September, the Bank of Japan s Policy Board decided to increase further its monetary accommodation, introducing what it termed  quantitative and qualitative monetary easing with yield curve control . It also committed itself to expanding the monetary base until the observed rate of inflation exceeds its price stability target and remains above that level in a stable manner. In the United States, on the other hand, the Federal Reserve System s Federal Open Market Committee indicated in September that  the case for an increase in the federal funds rate has strengthened . Despite a modest improvement, global trade in goods remains weak. Global trade in goods contracted further in July   the fifth month in a row   but the ECB Economic Bulletin, Issue 7 / 2016   Update on economic and monetary developments External environment 4 underlying momentum continued to improve (see Chart 2). The volume of world imports of goods fell by 0.4% in July on a three-month-on-three-month basis, following a 0.9% decline in June. However, recent figures suggest that global trade growth may have bottomed out, with the global PMI for new export orders increasing in the third quarter. Low energy price inflation continues to weigh on headline global inflation. Annual CPI inflation in OECD countries picked up slightly to stand at 0.9% in August. Meanwhile, CPI excluding food and energy was unchanged at 1.8%. Energy prices continued falling in August, but at a slower pace than in the previous month, declining by 6.7% year on year, while food prices decreased marginally. While the base effects of past declines in commodity prices are expected to contribute to an increase in headline inflation in the months ahead, the presence of ample spare capacity will continue to weigh on global inflation over the medium term. Chart 2 World trade in goods