European Central Bank — Economic Bulletin (Europe, 2018)

Economic Bulletin Issue 3 / 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 Implications of rising trade tensions for the global economy Factors driving the recent improvement in the euro area s international investment position Measures of slack in the euro area Articles 1 2 3 Real convergence in central, eastern and south-eastern Europe The impact of the corporate sector purchase programme on corporate bond markets and the financing of euro area non-financial corporations Risk sharing in the euro area Statistics 2 2 4 8 11 15 17 21 21 26 31 36 36 66 85 S1 ECB Economic Bulletin, Issue 3 / 2018 Contents 1 Update on economic and monetary developments Summary Following several quarters of higher than expected growth, incoming information since the Governing Council s meeting in early March points towards some moderation, while remaining consistent with a solid and broad-based expansion of the euro area economy.1 The risks surrounding the euro area growth outlook remain broadly balanced, but risks related to global factors, including the threat of increased protectionism, have become more prominent. Overall, the economy s underlying strength continues to support the Governing Council s confidence that inflation will converge towards its inflation aim of below, but close to, 2% over the medium term. At the same time, measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend. In this context, the Governing Council will continue to monitor developments in the exchange rate and other financial conditions with regard to their possible implications for the inflation outlook. Overall, an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term. On the global level, survey indicators remain generally consistent with a steady economic expansion. However, the tariff announcements in recent weeks represent a risk to global momentum. Global trade indicators were mixed but on the whole signal some deceleration at the start of the year. Furthermore, geopolitical risks have led to a pick-up in oil prices. Euro area sovereign bond yields have declined and sovereign bond spreads have decreased, the latter reflecting an improvement in country-specific macroeconomic fundamentals in the light of the ongoing economic expansion. Similarly, euro area equity prices have risen despite some episodes of heightened volatility. In foreign exchange markets, the euro has remained broadly unchanged in nominal effective terms. The analysis of the latest economic data and survey results suggests some moderation in the pace of growth since the start of the year. This moderation may in part reflect a pull-back from the high pace of growth observed at the end of last year, while temporary factors may also be at work. Overall, however, growth is expected to remain solid and broad-based. Private consumption is supported by ongoing employment gains (which, in turn, partly reflect past labour market reforms) and by growing household wealth. Business investment continues to strengthen on the back of very favourable financing conditions, rising corporate profitability and solid 1 Taking into account information available at the time of the Governing Council meeting of 26 April 2018. ECB Economic Bulletin, Issue 3 / 2018   Update on economic and monetary developments Summary 2 demand. Housing investment continues to improve. In addition, the broad-based global expansion is providing impetus to euro area exports. Euro area annual HICP inflation increased to 1.3% in March 2018, from 1.1% in February, mainly reflecting higher food price inflation. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around 1.5% for the remainder of the year. Measures of underlying inflation remain subdued overall. Going forward, they are expected to rise gradually over the medium term, supported by the ECB s monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth. The monetary analysis shows broad money (M3) continuing to expand at a robust pace, only slightly below the narrow range observed since mid-2015. M3 grew at an annual rate of 4.2% in February, reflecting the impact of the ECB s monetary policy measures and the low opportunity cost of holding the most liquid deposits. Accordingly, the narrow monetary aggregate M1 remained the main contributor to broad money growth, continuing to expand at a solid annual rate. The recovery in the growth of loans to the private sector observed since the beginning of 2014 is also proceeding. The euro area bank lending survey for the first quarter of 2018 indicates that loan growth continues to be supported by increasing demand across all loan categories, as well as a further easing in overall bank lending conditions. On the basis of the economic analysis and the signals coming from the monetary analysis, the Governing Council confirmed the need for an ample degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2% over the medium term. This continued monetary support is provided by the net asset purchases, by the sizeable stock of acquired assets and the ongoing and forthcoming reinvestments, and by the forward guidance on interest rates. Accordingly, the Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at their present 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 net asset purchases, at the current monthly pace of  30 billion, are intended to run until the end of September 2018, 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. Finally, the Governing Council reiterated that the Eurosystem will continue to reinvest the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary. ECB Economic Bulletin, Issue 3 / 2018   Update on economic and monetary developments Summary 3 1 External environment Global survey indicators remain consistent with a steady expansion of activity in the first quarter of 2018. The global composite output Purchasing Managers  Index (PMI) excluding the euro area decreased in March (see Chart 1), following declines in the manufacturing and service sectors. In quarterly terms, the PMI in the first quarter of 2018 remained slightly above the level recorded in the second half of 2017, pointing to an external environment that remained supportive of the euro area. The PMI was broadly unchanged in the United States during the first quarter, while it decreased in the United Kingdom and, to a lesser extent, in Japan, on the back of weaker outcomes in March. In emerging market economies, the quarterly PMI picked up in Brazil and China, while it edged down in India and Russia. 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 2011 2012 2013 2014 2015 2016 2017 2018 Sources: Haver Analytics, Markit and ECB staff calculations. Notes: The latest observations are for March 2018.  Long-term average  refers to the period from January 1999 to March 2018. The recent announcements of tariff increases by the United States represent a risk to global momentum. In late March, President Trump signed an order to impose import tariffs on steel and aluminium, to protect US industries from foreign competition. Furthermore, the US Administration announced increases in tariffs on USD 50 billion of Chinese goods. China has responded with a pledge to increase tariffs on similar amounts of US imports. Viewed in isolation, the measures announced so far are expected to have only a very small macroeconomic effect. However, the risks associated with a rise in protectionism have clearly increased. Expectations of an escalation in the dispute would affect investment decisions, with potentially more significant effects on global activity. Box 1 contains a detailed analysis of the implications of rising trade tensions for the global economy. Global financial conditions remain supportive of the global outlook, sustained by still accommodative monetary policies. Despite the recent volatility, global equity markets remain buoyant. The Federal Funds futures curve shifted upwards following the rate hike at the Federal Open Market Committee s March meeting. ECB Economic Bulletin, Issue 3 / 2018   Update on economic and monetary developments External environment 4 Markets continue to anticipate a gradual tightening, pricing in three further rate increases in 2018. Market expectations also suggest a rise in UK rates in the coming months, following the hawkish tone of the Bank of England s February In