European Central Bank — Economic Bulletin (Europe, 2022)

Economic Bulletin Issue 1 / 2022 Contents Update on economic, financial 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 4 5 6 7 8 Recent inflation developments in the United States and the euro area   an update How persistent supply chain disruptions could affect euro area potential output Firm productivity dynamism in the euro area Natural gas dependence and risks to euro area activity The role of migration in weak labour force developments during the COVID-19 pandemic Main findings from the ECB s recent contacts with non-financial companies Housing costs: survey-based perceptions and signals from price statistics Public wage and pension indexation in the euro area Articles 1 2 Owner-occupied housing and inflation measurement Next Generation EU: a euro area perspective Statistics ECB Economic Bulletin, Issue 1 / 2022   Contents 2 2 6 10 13 18 24 29 29 36 41 46 52 58 61 68 74 74 93 S1 1 Update on economic, financial and monetary developments Summary The euro area economy is continuing to recover and the labour market is improving further, helped by ample policy support. But growth is likely to remain subdued in the first quarter of 2022, as the current pandemic wave is still weighing on economic activity. Shortages of materials, equipment and labour continue to hold back output in some industries. High energy costs are hurting incomes of euro area households and earnings of firms and are likely to dampen spending. However, the economy is affected less and less by each wave of the pandemic and the factors restraining production and consumption should gradually ease, allowing the economy to pick up again strongly in the course of the year. Inflation has risen sharply in recent months and further surprised to the upside in January. This is primarily being driven by higher energy costs that are pushing up prices of goods and services across many sectors, as well as by higher food prices. Inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year. The Governing Council therefore confirmed the decisions taken at its monetary policy meeting last December. Accordingly, the Governing Council will continue reducing the pace of its asset purchases step by step over the coming quarters, and will end net purchases under the pandemic emergency purchase programme (PEPP) at the end of March. In view of the current uncertainty, the Governing Council needs more than ever to maintain flexibility and optionality in the conduct of monetary policy. The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at the ECB s 2% target over the medium term. Economic activity Global economic activity remained resilient in the fourth quarter of last year. Survey data point to robust economic growth towards the end of 2021, although growth in trade continued to be subdued. Supply chain bottlenecks showed tentative signs of easing. However, the emergence of the Omicron variant of the coronavirus (COVID- 19) and the potential for pandemic-related employee absences could result in further supply chain disruptions and pose risks to global economic activity in the near term. Global inflation continued to rise, reflecting higher energy prices and a broadening of price pressures across sectors. Global inflationary pressures are expected to ease over the course of 2022, as it is anticipated that energy prices will moderate. ECB Economic Bulletin, Issue 1 / 2022   Update on economic, financial and monetary developments Summary 2 Euro area economic growth weakened to 0.3%, quarter on quarter, in the final quarter of last year. Nevertheless, output reached its pre-pandemic level at the end of 2021. Economic activity and demand will likely remain muted in the early part of this year for several reasons. First, pandemic containment measures are affecting consumer services, especially in the travel, tourism, hospitality and entertainment sectors. Although infection rates are still very high, the impact of the pandemic on economic life is now proving less damaging. Second, high energy costs are reducing the purchasing power of households and the earnings of businesses, which constrains consumption and investment. And, third, shortages of equipment, materials and labour in some sectors continue to hamper the production of manufactured goods, delay construction and hold back the recovery in parts of the services sector. There are signs that these bottlenecks may be starting to ease, but they will still persist for some time. Looking beyond the near term, growth should rebound strongly in the euro area over the course of 2022, driven by robust domestic demand. As the labour market is improving further, with more people having jobs and fewer in job retention schemes, households should enjoy higher income and spend more. The global recovery and the ongoing fiscal and monetary policy support also contribute to this positive outlook. Targeted and productivity-enhancing fiscal measures and structural reforms, attuned to the conditions in different euro area countries, remain key to complement monetary policy effectively. Inflation Inflation in the euro area increased to 5.1% in January 2022, from 5.0% in December 2021. It is likely to remain high in the near term. Energy prices continue to be the main reason for the elevated rate of inflation. Their direct impact accounted for over half of headline inflation in January and energy costs are also pushing up prices of goods and services across many sectors. Food prices have also increased, owing to seasonal factors, elevated transportation costs and the higher cost of fertilisers. In addition, price rises have become more widespread, with the prices of a large number of goods and services having increased markedly. Most measures of underlying inflation have risen over recent months, although the role of temporary pandemic factors means that the persistence of these increases remains uncertain. Market-based indicators suggest a moderation in energy price dynamics in the course of 2022 and price pressures stemming from global supply bottlenecks should also subside. Labour market conditions are improving further, although wage growth remains muted overall. Over time, the return of the economy to full capacity should support faster growth in wages. Market-based measures of longer-term inflation expectations have remained broadly stable at rates just below 2% since the Governing Council s previous monetary policy meeting In December. The latest survey-based measures stand at around 2%. These factors will also contribute further to underlying inflation and will help headline inflation to settle durably at the ECB s 2% target. ECB Economic Bulletin, Issue 1 / 2022   Update on economic, financial and monetary developments Summary 3 Risk assessment The Governing Council continues to see the risks to the euro area economic outlook as broadly balanced over the medium term. The economy could perform more strongly than expected if households become more confident and save less than expected. By contrast, although uncertainties related to the pandemic have abated somewhat, geopolitical tensions have increased. Furthermore, persistently high costs of energy could exert a stronger than expected drag on consumption and investment. The pace at which supply bottlenecks are resolved is a further risk to the outlook for growth and inflation. Compared with the Governing Council s expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher. Financial and monetary conditions Market interest rates have increased since the December 2021 Governing Council meeting. However, bank funding costs have so far remained contained. Bank lending rates for firms and households continue to stand at historically low levels and financing conditions for the economy remain favourable. Lending to firms has picked up across all maturities. Robust demand for mortgages is sustaining lending to households. Banks are now as profitable as they were before the pandemic and their balance sheets remain solid. According to the latest euro area bank lending survey, loan demand by firms increased strongly in the last quarter of 2021. This was driven by both higher working capital needs   stemming from supply bottlenecks   and increased financing of longer-term investment. In addition, banks continue to hold an overall benign view of credit risks, mainly because of their positive assessment of the economic outlook. Monetary policy decisions Against this background, at its monetary policy meeting in February, the Governing Council therefore confirmed the decisions taken at its previous meeting last December. In the first quarter of 2022 the Governing Council is conducting net asset purchases under the PEPP at a lower pace than in the previous quarter. It will discontinue net asset purchases under the PEPP at the end of March 2022. The Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance. ECB Economic Bulletin, Issue 1 / 2022   Update on economic, financial and monetary developments Summary 4 The pandemic has shown that, unde