European Central Bank — Economic Bulletin (Europe, 2020)

Economic Bulletin Issue 4 / 2020 Contents Economic and monetary developments 1 1 2 3 4 5 6 Overview External environment Financial developments Economic activity Prices and costs Money and credit Fiscal developments Boxes 1 2 3 4 5 6 7 Impact of the COVID-19 lockdown on trade in travel services Coronavirus (COVID-19): market fear as implied by options prices The COVID-19 pandemic and access to finance for small and medium-sized enterprises: evidence from survey data Liquidity conditions and monetary policy operations in the period from 29 January to 5 May 2020 Regional labour market developments during the great financial crisis and subsequent recovery Short-time work schemes and their effects on wages and disposable income The COVID-19 crisis and its implications for fiscal policies Articles 1 2 Citizens  attitudes towards the ECB, the euro and Economic and Monetary Union Access to finance for small and medium-sized enterprises since the financial crisis: evidence from survey data Statistics 2 2 7 15 21 27 33 42 46 46 51 56 60 67 72 76 80 80 104 S1 ECB Economic Bulletin, Issue 4 / 2020   Contents 1 Economic and monetary developments 1 Overview At its monetary policy meeting on 4 June, the Governing Council decided to increase the envelope and extend the horizon for the pandemic emergency purchase programme (PEPP) and to reinvest its maturing principal payments, while continuing with the asset purchase programme (APP) and its reinvestments and keeping the key ECB interest rates unchanged. Incoming information confirms that the euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus (COVID-19) pandemic and the measures to contain it. Severe job and income losses and exceptionally elevated uncertainty about the economic outlook have led to a significant fall in consumer spending and investment. While survey data and real-time indicators for economic activity have shown some signs of a bottoming-out alongside the gradual easing of the containment measures, the improvement has so far been tepid compared with the speed at which the indicators plummeted in the preceding two months. The June 2020 Eurosystem staff macroeconomic projections for the euro area see growth declining at an unprecedented pace in the second quarter of this year, before rebounding again in the second half, crucially helped by the sizeable support from fiscal and monetary policy. Nonetheless, the projections entail a substantial downward revision to both the level of economic activity and the inflation outlook over the whole projection horizon, though the baseline is surrounded by an exceptional degree of uncertainty. While headline inflation is suppressed by lower energy prices, price pressures are expected to remain subdued on account of the sharp decline in real GDP and the associated significant increase in economic slack. Against this background, the Governing Council decided on a set of monetary policy measures to support the economy during its gradual reopening and to safeguard medium-term price stability. Economic and monetary assessment at the time of the Governing Council meeting of 4 June 2020 The COVID-19 epidemic has caused a sharp deterioration in the global outlook, as embedded in the June 2020 Eurosystem staff macroeconomic projections. The COVID-19 pandemic has paralysed the global economy, with measures to contain the spread of the virus taken by governments across the globe being a driving factor behind the recent sharp decline in economic activity. Several countries have recently started easing containment measures, but this process is likely to be very gradual. Economic activity, especially in emerging market economies, has also been adversely affected by a sharp fall in commodity prices, tighter financial conditions and substantial capital outflows. Incoming data confirm that the economic fallout from containment measures will be sharp and deep. In view of these severe global disruptions, the June 2020 Eurosystem staff macroeconomic projections envisage that world real GDP ECB Economic Bulletin, Issue 4 / 2020   Economic and monetary developments Overview 2 (excluding the euro area) will contract by 4.0% this year. The pace of this contraction is faster and its magnitude greater than seen in the Great Recession. Following a sharp contraction in the first two quarters of 2020, global activity is projected to start to recover in the third quarter and to increase by 6.0% and 3.9% in 2021 and 2022, respectively. Global trade will be affected more severely, as logistics disruptions and closed borders amplify the impact of the fallout. Despite a sharp deterioration in the global outlook, as embedded in the June projections, risks to this outlook are still skewed to the downside. Most importantly, the impact of the pandemic may prove to be stronger and longer lasting than currently expected. Although financial conditions in the euro area have loosened somewhat since the Governing Council s meeting in March 2020, they have not returned to the levels seen before the global spread of COVID-19. Over the review period (12 March 2020 to 3 June 2020) the forward curve of the euro overnight index average (EONIA) shifted upwards. Its inversion at short maturities is still present, albeit less so than on 12 March, signalling that market participants  expectations of further policy rate cuts have diminished and shifted further out into the future. Despite the monetary policy accommodation provided via the PEPP and other policy measures, long-term euro area sovereign bond yields increased over the review period. Prices of risky assets partly recovered from the losses incurred during February and March, mainly against the backdrop of an improvement in global risk sentiment and the perception that tail risks of an imminent global crisis have faded to some extent. In foreign exchange markets, the euro remained broadly stable in trade-weighted terms, with volatility in bilateral exchange rates reflecting uncertainty surrounding the COVID-19 pandemic. Euro area real GDP decreased by 3.8%, quarter on quarter, in the first quarter of 2020, and incoming data point to a further significant contraction of real GDP in the second quarter. The latest economic indicators and survey results confirm a sharp contraction of the euro area economy and rapidly deteriorating labour market conditions. The coronavirus pandemic and the necessary containment measures have severely affected both the manufacturing and services sectors, taking a toll on the productive capacity of the euro area economy and on domestic demand. Most recent indicators suggest some bottoming-out of the downturn in May as parts of the economy gradually reopen. Accordingly, euro area activity is expected to rebound in the third quarter as the containment measures are eased further, supported by favourable financing conditions, an expansionary fiscal stance and a resumption in global activity, although the overall speed and scale of the rebound remains highly uncertain. This assessment is also broadly reflected in the June 2020 Eurosystem staff macroeconomic projections for the euro area. In the baseline scenario of the projections, annual real GDP is expected to fall by 8.7% in 2020 and to rebound by 5.2% in 2021 and 3.3% in 2022. Compared with the March 2020 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised substantially downwards by 9.5 percentage points in 2020 and revised upwards by 3.9 percentage points in 2021 and 1.9 percentage points in 2022. Given the exceptional uncertainty currently surrounding the outlook, the projections also include two ECB Economic Bulletin, Issue 4 / 2020   Economic and monetary developments Overview 3 alternative scenarios. 1 In general, the extent of the contraction and the recovery will depend crucially on the duration and effectiveness of the containment measures, the success of policies to mitigate the adverse impact on incomes and employment, and the extent to which supply capacity and domestic demand are permanently affected. Overall, the Governing Council sees the balance of risks around the baseline projection tilted to the downside. According to Eurostat s flash estimate, euro area annual HICP inflation decreased to 0.1% in May, down from 0.3% in April, mainly on account of lower energy price inflation. On the basis of current and futures prices for oil, headline inflation is likely to decline somewhat further over the coming months and to remain subdued until the end of the year. Over the medium term, weaker demand will put downward pressure on inflation, which will be only partially offset by upward pressures related to supply constraints. Market-based indicators of longer-term inflation expectations have remained at depressed levels. While survey-based indicators of inflation expectations have declined over the short and medium term, longer-term expectations have been less affected. This assessment is also reflected in the June 2020 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation in the baseline scenario at 0.3% in 2020, 0.8% in 2021 and 1.3% in 2022. Compared with the March 2020 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised downwards by 0.8 percentage points in 2020, 0.6 percentage points in 2021 and 0.3 percentage points in 2022. Annual HICP inflation excluding energy and food is expected to be 0.8% in 2020, 0.7% in 2021 and 0.9% in 2022. The COVID-19 pandemic caused a sharp acceleration in monetary dynamics, driven by acute liquidity needs of businesses to financ