European Central Bank — Economic Bulletin (Europe, 2017)

Economic Bulletin Issue 5 / 2017 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 Convergence and adjustment in the Baltic States Recent drivers of euro area equity prices Lower interest rates and sectoral changes in interest income How do professional forecasters assess the risks to inflation? The 2017 country-specific recommendations Article 1 The composition of public finances in the euro area Statistics 2 2 4 7 10 14 17 21 21 28 31 36 40 44 44 S1 ECB Economic Bulletin, Issue 5 / 2017 1 Update on economic and monetary developments Summary The ECB s monetary policy measures have continued to secure the very supportive financing conditions that are necessary to make continuous progress towards a sustained convergence of inflation rates to levels below, but close to, 2% over the medium term. The incoming information confirms a continued strengthening of the economic expansion in the euro area, which has been broadening across sectors and regions.1 The risks to the growth outlook are broadly balanced. While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with the Governing Council s inflation aim, it has yet to translate into stronger inflation dynamics. At the global level, available indicators point to sustained global growth during the second quarter of 2017. Global headline inflation has moderated, reflecting waning support from energy prices. Global financial conditions have remained overall supportive, despite increases in long-term interest rates in advanced economies. Since the last Governing Council meeting in June, euro area long-term interest rates have risen, also on account of the improved growth prospects. Overall, the EONIA forward curve has moved upwards by around 15 basis points on average across maturities since early June. Euro area equity prices have declined for non-financial corporations but have increased for financial firms, while solid earnings expectations have continued to support prices in both sectors. Corporate bond yields have risen, as have risk-free interest rates, but corporate spreads have tightened, which is likely to reflect market expectations of solid economic growth in the euro area, among other things. The euro has appreciated in nominal effective terms. Incoming data, notably survey results, continue to point to solid, broad-based growth in the euro area in the near term. The pass-through of the monetary policy measures is supporting domestic demand and has facilitated the deleveraging process. The recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Private consumption is supported by employment gains, which are also benefiting from past labour market reforms, and by increasing household wealth. Moreover, the global recovery should increasingly lend support to trade and euro area exports. However, economic growth prospects continue to be dampened by a slow pace of implementation of structural reforms, particularly in product markets, and by remaining balance sheet adjustment needs in a number of sectors, notwithstanding ongoing improvements. The risks surrounding the euro area growth outlook remain broadly balanced. On the one hand, the ongoing positive cyclical momentum could generate a stronger than expected 1 Taking into account information available at the time of the Governing Council meeting on 20 July 2017. ECB Economic Bulletin, Issue 5 / 2017 - Update on economic and monetary developments Summary 2 economic upswing. On the other hand, downside risks primarily relating to global factors continue to exist. Euro area annual HICP inflation was 1.3% in June, down from 1.4% in May, mainly due to lower energy price inflation. Looking ahead, on the basis of current futures prices for oil, headline inflation is likely to remain around current levels in the coming months. At the same time, measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as domestic cost pressures, including wage growth, are still subdued. Underlying inflation in the euro area is expected to rise only gradually over the medium term, supported by monetary policy measures, the continuing economic expansion and the corresponding gradual absorption of economic slack. Broad money continued to expand at a robust pace, driven mainly by its most liquid components. In addition, the recovery in loans to the private sector observed since the beginning of 2014 is proceeding, supported by easing credit standards and increasing loan demand. Financing costs for euro area non-financial corporations and households remain favourable. The euro area bank lending survey for the second quarter of 2017 indicates that credit standards for loans to enterprises and loans to households for house purchase have further eased and that loan growth continues to be supported by increasing demand. At its meeting on 20 July 2017, based on the regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged. The Governing Council continues to expect the key ECB interest rates 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 current monthly pace of  60 billion, are intended to run until the end of December 2017, 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. The net purchases are made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. Looking ahead, the Governing Council confirmed that a very substantial degree of monetary accommodation is needed for euro area inflation pressures to gradually build up and support headline inflation developments in the medium term. 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. ECB Economic Bulletin, Issue 5 / 2017 - Update on economic and monetary developments Summary 3 1 External environment Survey-based indicators point to sustained global growth. In the second quarter of 2017 the global composite output Purchasing Managers  Index (PMI) (excluding the euro area) remained at levels similar to those recorded in the previous two quarters, close to long-run averages, suggesting a continuing steady expansion in global activity (see Chart 1). Among the major advanced economies, the PMI declined in the United States, while it picked up in the United Kingdom compared with the first quarter. Among emerging market economies, the PMI improved in India and Brazil, in the latter case pointing to an expansion for the first time in three years. The PMI decreased in China to stand just above the expansion threshold. Chart 1 Global composite output PMI (diffusion index) global excluding euro area global excluding euro area   long-term average advanced economies excluding euro area emerging market economies 60 58 56 54 52 50 48 2011 2012 2013 2014 2015 2016 2017 Sources: Markit and ECB calculations. Note: The latest observations are for June 2017. Global financial conditions remain overall supportive. Equity markets have moderated slightly in advanced economies over the past few weeks. Long-term interest rates have risen slightly in a number of major advanced economies amid market expectations about a gradual lessening of monetary accommodation. Among emerging market economies, long-term interest rates have also risen. However, in China, interbank rates have moderated slightly in the past few weeks, after a period since the beginning of the year in which financial conditions had tightened as authorities sought to curb leverage in the financial system, particularly in small banks and non-bank institutions. Global trade growth moderated in April. Following a boost at the turn of the year, global trade growth slowed in April (see Chart 2). The volume of merchandise imports decelerated strongly, in three-month-on-three-month terms, from 1.9% in March to 0.4% in April. The slowdown in merchandise trade was mainly driven by emerging market economies. Leading indicators continue, however, to signal positive prospects in the near term. In particular, the global PMI for new export orders ECB Economic Bulletin, Issue 5 / 2017 - Update on economic and monetary developments External environment 4 increased to 52.6 in June. Moreover, industrial activity developments have recently remained relatively robust across regions, which should be supportive of trade. Chart 2 Global trade and surveys (in three-month-on-three-month percentage (left-hand scale); diffusion index (right-hand scale)) global merchandise imports (left-hand scale) global PMI new export orders (right-hand scale) global PMI manufacturing excluding euro area (right-hand scale) 3 2 1 0 -1 -2 58 56 54 52 50 48 46 2011 2012 2013 2014 2015 2016 2017 Sources: Markit, CPB Netherlands Bureau for Economic Policy Analysis and ECB staff calculation. Note: The latest observations are for April 2017 for global merchandise imports, and June 2017 for PMIs. Global inflat