European Central Bank — Economic Bulletin (Europe, 2019)

Economic Bulletin Issue 5 / 2019 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 4 5 6 7 What is behind the decoupling of global activity and trade? Services trade liberalisation and global imbalances: a critical review of the empirical evidence Euro area foreign direct investment since 2018: the role of special purpose entities Sources of economic policy uncertainty in the euro area: a machine learning approach What is behind the change in the gap between services price inflation and goods price inflation? Country-specific recommendations for economic policies under the 2019 European Semester Priorities for fiscal policies under the 2019 European Semester Articles 1 2 3 Statistics Global value chain participation and exchange rate pass-through to export and import prices Social spending, a euro area cross-country comparison Understanding the crypto-asset phenomenon, its risks and measurement issues ECB Economic Bulletin, Issue 5 / 2019   Contents 2 2 4 8 10 14 17 22 22 27 33 41 46 51 55 60 60 76 100 S1 1 Update on economic and monetary developments Summary Incoming information since the last Governing Council meeting in early June indicates that, while further employment gains and increasing wages continue to underpin the resilience of the economy, softening global growth dynamics and weak international trade are still weighing on the euro area outlook. Moreover, the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets, is dampening economic sentiment, notably in the manufacturing sector. In this environment, inflationary pressures remain muted and indicators of inflation expectations have declined. Therefore, a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favourable and support the euro area expansion, the ongoing build-up of domestic price pressures and, thus, headline inflation developments over the medium term. Accordingly, the Governing Council adjusted its forward guidance on policy interest rates and underlined its determination to act if the medium-term inflation outlook continues to fall short of its aim. Survey indicators suggest that global economic activity continued to weaken in the second quarter of 2019 and the drop in the global services output Purchasing Managers' Index in June raises the risk of a more broad-based deterioration in the global growth outlook. Global import growth shifted back into positive territory in April after four months of continued contraction, but heightened trade tensions persist. Global inflation decreased in May, driven largely by a slowdown in energy prices. Since the Governing Council s meeting in June 2019, euro area long-term risk-free rates have declined amid market expectations of continuing accommodative monetary policy. Sovereign spreads have remained broadly stable, albeit with a large decrease in Italian spreads. Equity prices have increased, supported by the low risk-free rates, and spreads on corporate bonds have decreased. In foreign exchange markets, the euro has depreciated moderately in trade-weighted terms. Following an increase of 0.2% in the fourth quarter of 2018, euro area real GDP increased by 0.4%, quarter on quarter, in the first quarter of 2019. Incoming economic data and survey information continue to point to somewhat slower growth in the second and third quarters. This mainly reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector. At the same time, activity in the services and construction sectors is resilient and the labour market continues to improve. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, as well as the mildly expansionary euro area fiscal stance and the ongoing   albeit somewhat slower   growth in global activity. ECB Economic Bulletin, Issue 5 / 2019   Update on economic and monetary developments Summary 2 Euro area annual HICP inflation increased to 1.3% in June 2019, from 1.2 % in May, as lower energy price inflation was more than offset by higher HICP inflation excluding food and energy. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months, before rising again towards the end of the year. Looking through the recent volatility due to temporary factors, measures of underlying inflation remain generally muted. Indicators of inflation expectations have declined. While labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets, the pass-through of cost pressures to inflation is taking longer than previously anticipated. Over the medium term underlying inflation is expected to increase, supported by monetary policy measures, the ongoing economic expansion and stronger wage growth. Monetary dynamics remained resilient despite the fading-out of the positive impact of monthly net purchases under the asset purchase programme (APP) and weaker euro area economic growth. Credit to the private sector remained the main source of money creation and the contribution of net external assets also remained strong. The growth rate of loans to non-financial corporations (NFCs) remained relatively robust, benefiting from bank lending rates at new historical lows and favourable bank lending conditions, despite some tightening of credit standards on NFC loans in the second quarter of 2019. In May 2019 the net issuance of debt securities by euro area NFCs moderated after four consecutive months of strong issuance activity. Market debt financing costs for NFCs continue to be very favourable. Against this overall background, the Governing Council decided to keep the key ECB interest rates unchanged and expects them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term. The Governing Council confirmed that the Eurosystem will continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when the key ECB interest rates are lifted, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner. In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce forward guidance on policy rates, mitigating measures such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases. ECB Economic Bulletin, Issue 5 / 2019   Update on economic and monetary developments Summary 3 1 External environment Survey indicators suggest that global economic activity continued to weaken in the second quarter of 2019. The global composite output Purchasing Managers  Index (PMI) excluding the euro area was unchanged in June (see Chart 1), as a marginal increase in services output was offset by a decline in manufacturing. In quarterly terms, however, the PMI declined in the second quarter to 51.5, from 52.8 in the previous quarter (on the back of a drop in both the manufacturing and services indices since March), which is consistent with a softening in global economic activity. The manufacturing output PMI has been decreasing steadily over the past year and in June fell below the 50 threshold indicating a contraction in activity. After a period of relative stability, the services index also declined in the second quarter, but continues to indicate an expansion. Developments were mixed across countries in the second quarter. Among advanced economies, the composite output PMI decreased in the United States and the United Kingdom (in the latter falling below the expansionary threshold in June), while it increased slightly in Japan. In emerging market economies, the composite output PMI remained broadly unchanged in China, while it decreased in India, Russia and Brazil. In Brazil, it fell below the expansionary threshold despite a moderate pick-up in June. Chart 1 Global composite output PMI (diffusion indices) Global composite output excluding the euro area Global composite output excluding the euro area   long-term average Global manufacturing output excluding the euro area Global services output excluding the euro area 58 56 54 52 50 48 2012 2013 2014 2015 2016 2017 2018 2019 Sources: Haver Analytics, Markit and ECB calculations. Notes: The latest observations are for June 2019.  Long-term average  refers to the period from January 1999 to June 2019. The drop in the global services output PMI in the second quarter increases the risk of