European Central Bank — Economic Bulletin (Europe, 2016)

Economic Bulletin Issue 1 / 2016 30 53%100%3,5E7,5E6EEEE80 6E6EE Contents Update on economic and monetary developments Summary 1 External environment 2 Financial developments 3 Economic activity 4 Prices and costs 5 Money and credit Boxes 1 2 What is driving Brazil s economic downturn? A closer look at differences between industrial gross value added and industrial production 3 Eurosystem publishes more detailed criteria for accepting rating agencies article 1 Recent developments in the composition and cost of bank funding in the euro area Statistics 3 5 7 9 11 13 16 19 23 26 S1 2 ECB Economic Bulletin, Issue 1 / 2016   Contents Update on economic and monetary developments Summary Global growth remains modest and uneven. While activity continues to expand at a solid pace in advanced economies, developments in emerging market economies remain weak overall and more diverse. After a very weak first half of the year in 2015, global trade is recovering, albeit at a slow pace. Global headline inflation has remained low and recent additional declines in oil and other commodity prices will further dampen inflationary pressures. Increased uncertainty related to developments in China and renewed oil price declines have led to a sharp correction in global equity markets and renewed downward pressures on euro area sovereign bond yields. Corporate and sovereign bond yield spreads have widened slightly. The increase in global uncertainty has been accompanied by an appreciation of the effective exchange rate of the euro. The economic recovery in the euro area is continuing, largely on the back of dynamic private consumption. More recently, however, the recovery has been partly held back by a slowdown in export growth. The latest indicators are consistent with a broadly unchanged pace of economic growth in the fourth quarter of 2015. Looking ahead, domestic demand should be further supported by the ECB s monetary policy measures and their favourable impact on financial conditions, as well as by the earlier progress made with fiscal consolidation and structural reforms. Moreover, the renewed fall in the price of oil should provide additional support for households  real disposable income and corporate profitability and, therefore, private consumption and investment. In addition, the fiscal stance in the euro area is becoming slightly expansionary, reflecting inter alia measures in support of refugees. However, the recovery in the euro area is dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms. The risks to the euro area growth outlook remain on the downside and relate in particular to the heightened uncertainties regarding developments in the global economy as well as to broader geopolitical risks. Euro area annual HICP inflation was 0.2% in December 2015, compared with 0.1% in November. The December outcome was lower than expected, mainly reflecting the renewed sharp decline in oil prices, as well as lower food and services price inflation. Most measures of underlying inflation continued to be broadly stable, following a pick-up in the first half of 2015. Non-energy import prices were still the main source of upward price momentum as domestic price pressures remained moderate. On the basis of current oil futures prices, which are well below the level observed a few weeks ago, the expected path of annual HICP inflation in 2016 is now significantly lower compared with the outlook in early December 2015. Inflation rates are currently expected to remain very low or to turn negative in the coming months and to pick up 3 ECB Economic Bulletin, Issue 1 / 2016   Update on economic and monetary developments only later in 2016. Thereafter, supported by the ECB s monetary policy measures and the economic recovery, inflation rates should continue to recover, although risks of second-round effects from the renewed fall in energy price inflation will be monitored closely. Broad money growth remained robust in November, driven mainly by the low opportunity cost of holding the most liquid monetary assets and the impact of the ECB s expanded asset purchase programme. In addition, lending to the euro area private sector continued on a path of gradual recovery, supported by easing credit standards and increasing loan demand. Nevertheless, the annual growth rate of loans to non-financial corporations remains low, as developments in loans to enterprises continue to reflect the lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets. At its meeting on 21 January 2016, based on its regular economic and monetary analyses, and after the recalibration of the ECB s monetary policy measures in December 2015, the Governing Council decided to keep the key ECB interest rates unchanged. These rates are expected to remain at present or lower levels for an extended period of time. With regard to non-standard monetary policy measures, the asset purchases are proceeding smoothly and continue to have a favourable impact on the cost and availability of credit for firms and households. More generally, and taking stock of the evidence available at the beginning of 2016, it is clear that the monetary policy measures adopted by the Governing Council since mid-2014 are working. As a result, developments in the real economy, credit provision and financing conditions have improved and have strengthened the euro area s resilience to recent global economic shocks. The decisions taken in early December to extend the monthly net asset purchases of  60 billion to at least the end of March 2017, and to reinvest the principal payments on maturing securities for as long as necessary, will result in a significant addition of liquidity to the banking system and will strengthen the forward guidance on interest rates. However, at the start of the new year, the Governing Council assessed that downside risks have increased again amid heightened uncertainty about emerging market economies  growth prospects, volatility in financial and commodity markets, and geopolitical risks. In this environment, euro area inflation dynamics also continue to be weaker than expected. Therefore, it will be necessary for the Governing Council to review and possibly reconsider the ECB s monetary policy stance in early March, when the new staff macroeconomic projections   also covering the year 2018   will become available. In the meantime, work will be carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation, if needed. 4 ECB Economic Bulletin, Issue 1 / 2016   Update on economic and monetary developments 1 External environment Survey indicators suggest that global growth remained modest and uneven at the turn of the year. The global composite output Purchasing Managers  Index (PMI) decreased from 53.6 to 52.9 in December 2015 against the backdrop of a slowdown in both the services and manufacturing sectors (see Chart 1). In quarterly terms the global output PMI declined slightly in the fourth quarter relative to the previous quarter. Data point to a sustained growth momentum in advanced economies, with PMIs increasing in the United Kingdom and Japan, although momentum slowed somewhat in the United States. Developments across emerging market economies (EMEs) remain weak overall and more diverse, with the latest PMI data suggesting some strengthening in China, a deceleration in growth in India and Russia, and continued weakness in Brazil in the fourth quarter. Chart 1 Global PMI (diffusion index, 50 = no change) composite output manufacturing output composite average 1999-present manufacturing average 1999-present 60 55 50 45 40 35 30 2008 2009 2010 2011 2012 2013 2014 2015 Sources: Markit and ECB staff calculations. Note: The latest observation refers to December 2015. Global trade has continued to recover, albeit at a slow pace. Although global trade in the first half of 2015 was very weak, it has since improved. The growth in the volume of global goods imports weakened slightly in October to 1.8% (three-month on three-month), down from 2.3% in September. Import growth momentum strengthened in advanced economies, but the contribution from EMEs decreased, driven principally by lower trade in Latin America. However, early monthly data at the country level confirm that global import growth may have moderated again towards the end of last year. The global PMI for new export orders dipped slightly in December (to 50.6), but remained in positive territory, suggesting continued modest trade growth around the turn of the year. Global headline inflation has remained low. A less negative contribution from energy prices pushed up slightly annual consumer price inflation in the OECD area to 0.7% in November from 0.6% in the previous month. Inflation excluding food and energy remained unchanged at 1.8%. However, the overall low global CPI inflation masks considerable differences across countries. While headline inflation is low in most advanced economies and also in China, it is considerably higher in some large economies, including Russia, Brazil and Turkey. Recent additional declines in oil and other commodity prices will further dampen inflationary pressures. Against the background of an oversupplied oil market and weakening oil demand, Brent crude oil prices have undergone a renewed downturn since mid-October 2015, falling to USD 29 per barrel on 20 January 2016. On the supply side, OPEC s December decision to maintain current production levels at record rates has fuelled