European Central Bank — Economic Bulletin (Europe, 2015)

Issue 5 / 2015 Economic Bulletin30 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 Why has growth in emerging market economies slowed? 2 3 Does consumer confidence predict private consumption? Recent developments in extra-euro area trade: the role of emerging market economies 4 Has underlying inflation reached a turning point? 5 The impact of negative short-term rates on the money market fund industry 3 5 7 9 10 12 15 18 20 23 27 Article Real convergence in the euro area: evidence, theory and policy implications 30 Statistics S1 2 ECB Economic Bulletin, Issue 5 / 2015   Contents Update on economic and monetary developments Summary Following some loss of momentum in early 2015, the global economy is expected to resume its modest recovery path, with notable differences across regions. In the United States and the United Kingdom there are signs of a rebound in activity, while in Japan available indicators suggest a softening in the growth outlook, after a strong first quarter. In China, recent data indicate a rebound in economic expansion in the second quarter, but the fall in equity prices has increased uncertainty. The momentum in global trade remains weak, mostly owing to declining trade in emerging market economies. Global headline inflation remains low, as it is held down by earlier energy price declines. The latest developments in the euro area financial markets have been marked by increased volatility, primarily on account of heightened uncertainty regarding the negotiations between Greece and its official creditors. While euro area equity prices have generally risen since early June, some pronounced oscillations were recorded in recent weeks. At the same time, euro area long-term government bond yields remained, overall, broadly unchanged and stayed at levels higher than the recent historical lows of mid-April. Differentials with respect to German yields declined in Italy, Spain and Portugal and remained broadly stable overall across the remaining euro area countries, excluding Greece. The euro exchange rate weakened in effective terms. Euro area quarterly real GDP growth in the first quarter of 2015 was confirmed at 0.4%. Growth was driven by domestic demand on the back of robust contributions from private consumption and now also from investment. The latest survey data, up to June, remain consistent with a continuation of the moderate growth trend in the second quarter. Looking ahead, the economic recovery is expected to broaden further. Domestic demand should be supported by the ECB s monetary policy measures and their favourable impact on financial conditions, as well as by the progress made with fiscal consolidation and structural reforms. Moreover, low oil prices should continue to bolster households  real disposable income and corporate profitability, thus supporting private consumption and investment. Furthermore, demand for euro area exports should benefit from improvements in price competitiveness. Inflation bottomed out at the beginning of the year and has moved back into positive territory in recent months. Annual HICP inflation declined slightly in June, to 0.2% from 0.3% in May. On the basis of the available information and current oil futures prices, it is expected to remain low in the months ahead and rise towards the end of the year, partly on account of base effects linked to the fall in oil prices in late 2014. Supported by the expected economic recovery, the impact of the lower euro 3 ECB Economic Bulletin, Issue 5 / 2015   Update on economic and monetary developments exchange rate and the assumption embedded in oil futures markets of somewhat higher oil prices in the years ahead, inflation rates are expected to pick up further during 2016 and 2017. Narrow and broad money dynamics continue to be robust. In a low interest rate environment, portfolio substitution is driving broad money growth, and overnight deposits continue to make a sizeable contribution to M3 growth. Loan dynamics have improved further but remain weak, in particular for loans to non-financial corporations. Bank lending rates have declined further, and the most recent euro area bank lending survey points to further improvements in lending conditions and credit demand. Also, fragmentation in terms of credit demand in individual countries decreased and the targeted longer-term refinancing operations helped to improve the terms and conditions for credit supply. Overall, the monetary policy measures put in place by the ECB since June 2014 are providing visible support for improvements both in borrowing conditions for firms and households and in credit flows across the euro area. Based on its regular economic and monetary analyses and in line with the Governing Council s forward guidance, at its meeting on 16 July 2015, the Governing Council decided to keep the key ECB interest rates unchanged. Regarding non-standard monetary policy measures, the asset purchase programmes continue to proceed smoothly. The Governing Council also reaffirmed its previous assessment that there is a need to maintain a steady monetary policy course, where the full implementation of all monetary policy measures will provide the necessary support to the euro area economy and lead to a sustained return of inflation rates towards levels below, but close to, 2% in the medium term. Looking ahead, the Governing Council will continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability. If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate. 4 ECB Economic Bulletin, Issue 5 / 2015   Update on economic and monetary developments 1 External environment Following a slowdown in the pace of expansion in early 2015, the global economy is expected to resume its modest recovery path. The latest surveys suggest a steady growth momentum in the second quarter of 2015. The global composite output Purchasing Managers  Index (PMI), excluding the euro area, dipped slightly in June (see Chart 1), to below its long-term average. In quarterly terms, the index recorded a modest decline in the second quarter of 2015 compared with the previous quarter. Quarterly output growth remained solid in advanced economies, particularly in the United States and the United Kingdom. PMIs in the emerging market economies (EMEs) continued to weigh on the global index, reflecting the ongoing slowdown in EME growth caused by both cyclical and structural factors (see Box 1). Meanwhile, other short-term indicators point to some resilience in global activity. The Ifo World Economic Climate index increased further in the second quarter of 2015 and the OECD composite leading indicators also continue to suggest overall steady growth momentum. Momentum in global trade remains weak, but the latest PMI export orders indicators suggest that this could be a trough. The volume of world merchandise imports declined by 1.1% in April 2015 on a three-month-on-three-month basis, slightly less than in March (see Chart 2). The divergence between advanced economies and emerging market economies, observed for activity, is mirrored in trade developments, with the recent weak momentum caused by decreasing import volumes in emerging markets, particularly in Asia. While the momentum in trade growth also slowed somewhat in advanced economies, it remained solid overall. Chart 1 Global composite output PMI (diffusion index) Chart 2 Merchandise import growth (three-month-on-three-month percentage changes; percentage point contributions; seasonally adjusted) global excluding euro area global excluding euro area: long-term average emerging market economies advanced economies excluding euro area global global 1991-2007 average emerging markets advanced economies excluding euro area 60 55 50 45 40 35 2008 2009 2010 2011 2012 2013 2014 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 2012 2013 2014 2015 Sources: Markit and ECB. Notes: The latest observation refers to June 2015.  Global excluding euro area: long- term average  refers to the period from 1999 onwards. Emerging markets are Brazil, China, India and Russia. Advanced economies are Japan, the United States and the United Kingdom. Sources: CPB and ECB calculations. Note: The latest observation refers to April 2015. 5 ECB Economic Bulletin, Issue 5 / 2015   Update on economic and monetary developments Global headline inflation remains low, restrained by base effects from earlier energy price declines. Annual OECD inflation increased slightly in May to 0.6%, driven by a slower annual decline in energy prices than in the previous month. Excluding food and energy, annual OECD inflation remained low and stable at 1.6%. Developments in consumer price inflation among major non-OECD countries diverged considerably, with annual inflation increasing further in Brazil, while declining in Russia (from elevated levels), China and India. US activity shows signs of a rebound, after stalling at the start of 2015. The decline in real GDP (at -0.04% quarter on quarter) in the first quarter of 2015 turned out smaller than previously estimated. The soft patch was mainly the result of cold weather, port disruptions caused by labour disputes, the impact of an earlier US dollar appreciation and a sharp decline in investment in the energy sector. Recent indicators are consistent with a rebo