European Central Bank — Economic Bulletin (Europe, 2018)

Economic Bulletin Issue 1 / 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 The macroeconomic impact of the US tax reform Consumption of durable goods in the ongoing economic expansion Recent house price increases and housing affordability Article 1 Labour supply and employment growth Statistics 2 2 4 7 9 13 16 20 20 25 29 35 35 S1 ECB Economic Bulletin, Issue 1 / 2018 Contents 1 Update on economic and monetary developments Summary The information that has become available since the Governing Council s last meeting of the year 2017 confirms a robust pace of economic expansion, which accelerated more than expected in the second half of 2017.1 The strong cyclical momentum, the ongoing reduction of economic slack and increasing capacity utilisation strengthened further the Governing Council s confidence that inflation will converge towards its inflation aim of below, but close to, 2%. The risks surrounding the euro area growth outlook are broadly balanced. On the one hand, the prevailing strong cyclical momentum could lead to further positive growth surprises in the near term. On the other hand, downside risks continue to relate primarily to global factors, including developments in foreign exchange markets. The global economy is continuing to expand at a solid rate, with increasing signs of synchronisation. Activity is benefiting from favourable global financial conditions and strong sentiment. Rising oil prices have contributed to increasing global inflation, but inflation excluding food and energy prices has remained more stable. Amid this improved economic sentiment, euro area yields and equities have risen since the Governing Council s meeting in December. In foreign exchange markets, the euro appreciated overall in trade-weighted terms, in particular against the US dollar. This recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability. The economic analysis based on the latest economic data and survey results indicates continued strong and broad-based growth momentum at the turn of the year. Private consumption is supported by rising employment, which is also benefiting from 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 demand. Housing investment has improved further over recent quarters. In addition, the broad-based global expansion is providing impetus to euro area exports. Euro area annual HICP inflation was 1.4% in December 2017, down from 1.5% in November, mainly reflecting developments in energy prices. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around current levels in the coming months. Measures of underlying inflation remain subdued   in part owing to special factors   and have yet to show convincing signs of a sustained upward trend. Looking forward, they are expected to rise 1 Taking into account information available at the time of the Governing Council meeting of 25 January 2018. ECB Economic Bulletin, Issue 1 / 2018   Update on economic and monetary developments Summary 2 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 confirms that broad money growth continued to expand at the robust pace generally witnessed since mid-2015. The recovery in loan growth to the private sector also continued. The euro area bank lending survey for the fourth quarter of 2017 shows that loan growth was still supported by increasing loan demand and the easing of credit standards for loans, in particular to households. Moreover, financing costs for euro area non-financial corporations (NFCs) have remained favourable, with bank lending rates for NFCs being close to their historical lows. Considering the outcome of the economic analysis with 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%. While the Governing Council s confidence that inflation will converge towards its inflation aim has strengthened, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. Therefore, 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. 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 new monthly pace of  30 billion in place since January, 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. Moreover, the Governing Council reconfirmed that if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration. Finally, the Governing Council reiterated that the Eurosystem will reinvest the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. ECB Economic Bulletin, Issue 1 / 2018   Update on economic and monetary developments Summary 3 1 External environment Global growth has continued to firm up. Following solid global GDP growth in the third quarter of 2017, survey indicators point to sustained global growth momentum in the final months of last year. The global composite output Purchasing Managers  Index (PMI) increased to 54.4 in December, from 54.0 in the previous month. The strong performance in December reflected ongoing robust expansion in advanced economies and a pick-up in emerging economies, driven by China and India in particular. The latest data are consistent with indications of an ongoing broad-based and synchronised global economic recovery (see Chart 1). Chart 1 Industrial production and manufacturing PMI (monthly data; percentage share of countries with rising growth in industrial production; percentage share of countries with a PMI manufacturing diffusion index above 50) industrial production (excluding construction) manufacturing PMI 100 90 80 70 60 50 40 30 20 10 0 2013 2014 2015 2016 2017 Sources: Markit, national sources, OECD and ECB calculations. Notes: The latest observations are for September 2017 for industrial production and December 2017 for the manufacturing PMI. The chart comprises data for 19 advanced and emerging market economies. For industrial production, the line shows the share of countries where the three-month average annual change in industrial production is higher than the previous three-year average annual change. Survey indicators point to continued strong global trade momentum in the final quarter of 2017. Global goods import growth slowed in the first months of the fourth quarter, with the volume of merchandise imports increasing by 0.8% in three- month-on-three-month terms in November, following growth of 1.6% in the third quarter (see Chart 2). The decline was driven by a moderation in imports in Asia and in a number of advanced economies. However, trade indicators have been more resilient, suggesting that in the fourth quarter world imports expanded at a pace similar to that seen in the third quarter. Global PMI new export orders rose to 53.8 in December, from 53.7 in the previous month, which is above its long-term average. ECB Economic Bulletin, Issue 1 / 2018   Update on economic and monetary developments External environment 4 Chart 2 Global trade and surveys (three-month-on-three-month percentage changes, left-hand scale; diffusion index, right-hand scale) global merchandise imports (left-hand scale) world 1991 - 2007 average (left - hand scale) global PMI manufacturing excluding euro area (right-hand scale) global PMI new export orders (right-hand scale) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 60 58 56 54 52 50 48 46 44 2011 2012 2013 2014 2015 2016 2017 Sources: Markit, CPB Netherlands Bureau for Economic Policy Analysis and ECB calculations. Note: The latest observations are for November 2017 for global merchandise imports and December 2017 for the PMIs. Global inflation picked up in November. Annual consumer price inflation in the OECD area increased to 2.4% in November, from 2.2% in October, reflecting acceleration in energy and food prices. However, excluding food and energy, inflation remained stable at 1.9%. Oil prices have continued to increase in recent weeks. Brent crude oil prices rose from around USD 64 per barrel in mid-December to over USD 69 per barrel. Higher oil prices during this period partly reflect supp