European Central Bank — Economic Bulletin (Europe, 2022)

Economic Bulletin Issue 4 / 2022 Contents Economic, financial and monetary developments Overview 1 2 3 4 5 6 External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments Fiscal developments Boxes 1 2 3 4 5 6 7 8 The impact of the war in Ukraine on euro area energy markets The impact of the Russian invasion of Ukraine on euro area activity via the uncertainty channel The impact of the influx of Ukrainian refugees on the euro area labour force The impact of climate change on activity and prices   insights from a survey of leading firms Does the private sector foresee a stagflation episode? The surge in euro area food inflation and the impact of the Russia- Ukraine war A new indicator of domestic inflation for the euro area Liquidity conditions and monetary policy operations from 9 February to 19 April 2022 Articles 1 2 3 Energy price developments in and out of the COVID-19 pandemic   from commodity prices to consumer prices Firm debt financing structures and the transmission of shocks in the euro area The euro short-term rate ( STR): completing the transition to the new euro benchmark Statistics ECB Economic Bulletin, Issue 4 / 2022   Contents 2 2 9 15 22 29 34 42 46 46 54 58 63 69 74 81 88 94 94 116 136 S1 1 Economic, financial and monetary developments Overview High inflation is a major challenge for everyone. The Governing Council will make sure that inflation returns to its 2% target over the medium term. In May inflation again rose significantly, mainly because of surging energy and food prices, including due to the impact of the war in Ukraine. But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly. Eurosystem staff have revised their baseline inflation projections up significantly. These projections indicate that inflation will remain undesirably elevated for some time. However, moderating energy costs, the easing of supply disruptions related to the pandemic and the normalisation of monetary policy are expected to lead to a decline in inflation. The June 2022 Eurosystem staff macroeconomic projections for the euro area foresee annual inflation at 6.8% in 2022, before it is projected to decline to 3.5% in 2023 and 2.1% in 2024   higher than in the March projections. This means that headline inflation at the end of the projection horizon is projected to be slightly above the ECB s target. Inflation excluding energy and food is projected to average 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024   also above the March projections. Russia s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, leading to shortages of materials and contributing to high energy and commodity prices. These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic. Once current headwinds abate, economic activity is expected to pick up again. This outlook is broadly reflected in the Eurosystem staff macroeconomic projections, which foresee annual real GDP growth at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. Compared with the March projections, the outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up. On the basis of the updated assessment, the Governing Council decided to take further steps in normalising its monetary policy. Throughout this process, the Governing Council will maintain optionality, data-dependence, gradualism and flexibility in the conduct of monetary policy. First, the Governing Council decided to end net asset purchases under its asset purchase programme (APP) as of 1 July 2022. The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts ECB Economic Bulletin, Issue 4 / 2022   Economic, financial and monetary developments Overview 2 raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance. Second, the Governing Council undertook a careful review of the conditions which, according to its forward guidance, should be satisfied before it starts raising the key ECB interest rates. As a result of this assessment, the Governing Council concluded that those conditions have been satisfied. Accordingly, and in line with its policy sequencing, the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting. Looking further ahead, it expects to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium- term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting. Third, beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate. In line with the commitment to its 2% medium-term target, the pace at which the Governing Council adjusts its monetary policy will depend on the incoming data and how it assesses inflation will develop in the medium term. Within the Governing Council s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability. Economic activity The economic fallout from the Russian invasion of Ukraine and the new lockdowns in China represent two key headwinds to global growth in the near term. Survey indicators confirm that global activity is moderating. Disrupted economic activity in Asia and the war in Ukraine are putting pressure on global supply chains, following a brief period of easing earlier this year. Supply chain and commodity market disruptions are stoking inflation amid growing evidence that inflationary pressures are intensifying and broadening. Increasing inflationary pressures are also evident from the rising export prices of the euro area s competitors. Commodity prices remain volatile and subject to supply risks, whereas financial conditions have tightened. Global financial conditions tightened, reflecting monetary policy normalisation, falling prices of risky assets and rising yields. Against this background, the June 2022 Eurosystem staff macroeconomic projections indicate that global real GDP   excluding the euro area   will grow at 3.0% in 2022, 3.4% in 2023 and 3.6% in 2024   a weaker growth trajectory than foreseen in the March projections. The two key headwinds are projected to weigh significantly on trade in the near term, but their impact is expected to dissipate thereafter. The projected growth in euro area foreign demand is more subdued and has undergone more significant downward revisions than growth in world imports, as European countries outside the euro area with tighter economic links to Russia and Ukraine are more affected by the economic shocks triggered by the invasion. In an environment of elevated uncertainty, the ECB Economic Bulletin, Issue 4 / 2022   Economic, financial and monetary developments Overview 3 balance of risks around the baseline projections is firmly tilted to the downside for growth and to the upside for inflation. The Russia-Ukraine war is severely affecting the euro area economy and the outlook is still surrounded by high uncertainty. But the conditions are in place for the economy to continue to grow and to recover further over the medium term. In the near term, the Governing Council expects activity to be dampened by high energy costs, the deterioration in the terms of trade, greater uncertainty and the adverse impact of high inflation on disposable income. The war in Ukraine and renewed pandemic restrictions in China have made supply bottlenecks worse again. As a result, firms face higher costs and disruptions in their supply chains, and the outlook for their future output has deteriorated. Despite a better than expected outcome in 2021, the outlook for the euro area budget balance has deteriorated significantly since the finalisation of the March 2022 ECB staff macroeconomic projections. The more adverse outlook is related to a worsening of the economic cycle, increased expected interest payments and additional discretionary government spending. Fiscal support measures have been aimed in particular at countering the rising cost of living for consumers, but also at financing defence capacities and supporting refugees from the war in Ukraine. Nonetheless, according to the June 2022 Eurosystem staff macroeconomic projections, the euro area government budget deficit is expected to continue falling   from 5.1% of GDP in 2021 to 3.8% in 2022 and further to 2.4% by the end of the forecast horizon. After the strong loosening during the coronavirus crisis in 2020, the fiscal stance tightened last year and is projected to continue to tighten gradually in 2022 and 2023. The projected slight tightening in 2022 is mainly due to the reversal of a significant part of the pandemic emergency support, which will be only partially compensated by additional stimulus measures in response to the energy price shock and other spending related to the Russia-Ukraine war. The fiscal tightening is projected to be somewhat stronger in 2023, whe