European Central Bank — Economic Bulletin (Europe, 2015)

Economic Bulletin30 53%100%3,5E7,5E6EEEE80 6E6EEIssue 2 / 2015   European Central Bank, 2015 Postal address 60640 Frankfurt am Main Germany Telephone +49 69 1344 0 Website www.ecb.europa.eu This Bulletin was produced under the responsibility of the Executive Board of the ECB. Translations are prepared and published by the national central banks. All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The cut-off date for the statistics included in this issue was 4 March 2015. ISSN 2363-3417 (epub) ISSN 2363-3417 (online) EU catalogue number QB-BP-15-002-EN-E (epub) EU catalogue number QB-BP-15-002-EN-N (online) Contents eConomiC and monetary developments Overview 1 External environment 2 Financial developments 3 Economic activity 4 Prices and costs 5 Money and credit 6 Fiscal developments Boxes Box 1 Assessing US inflation developments using the Phillips curve Box 2 Liquidity conditions and monetary policy operations in the period from 12 November 2014 to 27 January 2015 Box 3 Recent movements in the effective exchange rate of the euro Box 4 Factors behind recent household saving patterns in the euro area Box 5 The 2015 macroeconomic imbalance procedure Box 6 Effects of e-commerce on inflation Box 7 Follow-up to the review of draft budgetary plans for 2015 artiCles Progress with structural reforms across the euro area and their possible impacts Who holds what? New information on securities holdings statistiCs 5 8 1 2 1 7 2 2 2 7 3 3 3 5 3 8 4 2 4 5 4 8 5 1 5 5 5 9 7 2 s1 ECB Economic Bulletin Issue 2 / 2015 3 e Co n o m iC a n d m o n e t a r y d e v e l o p m e n t s overview With a view to pursuing the ECB s price stability mandate, the Governing Council has taken a number of monetary policy measures to provide a sufficient degree of monetary policy accommodation. Following the monetary policy initiatives taken by the ECB between June and September 2014, which included further interest rate cuts, the introduction of targeted longer- term refinancing operations (TLTROs) and purchases of selected private sector assets (under the asset-backed securities purchase programme (ABSPP) and the third covered bond purchase programme (CBPP3)), the Governing Council decided in January 2015 to expand its asset purchase programme (APP) to encompass, as of March, euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions. The combined monthly purchases of public and private sector securities will amount to  60 billion. They are intended to be carried out until end-September 2016 and will in any case be conducted until the Governing Council sees a sustained adjustment in the path of inflation which is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term. The asset purchase programme has already produced a substantial easing of broad financial conditions. In December 2014 and most of January 2015 financial market developments were to a large extent driven by market expectations regarding the announcement of the APP. In this context, euro area bond yields declined across instruments, maturities and issuers and in many cases reached new historical lows. Since the declines in yields on AAA-rated long-term euro area sovereign bonds coincided with increases in equivalent US bond yields, the decoupling of euro area and US government bond yields continued. Yields on lower-rated euro area sovereign bonds also fell, but were more volatile amid uncertainty about Greece s continued access to financial assistance. Spreads on investment-grade corporate bonds continued their decline, while ABS spreads remained broadly stable. Following the APP announcement, euro area bond yields fell further, while stock prices in the euro area increased considerably. The euro s exchange rate has weakened significantly over recent months. Favourable developments in financial markets have led to lower bank funding costs, which have gradually been passed on to the cost of external finance for the private sector. The ECB s monetary policy measures have resulted in an improvement in bank financing conditions, with yields on unsecured bank bonds declining to historical lows in the fourth quarter of 2014. This improvement has been gradually passed through to bank lending rates for households and non-financial corporations (NFCs), which in the third and fourth quarters of 2014 fell substantially. The reduction in bank funding costs and in bank lending rates in the second half of 2014 can be partly attributed to the TLTROs, which are designed to improve banks  access to longer-term liquidity and stimulate credit growth in the real economy. The TLTROs should also have helped narrow margins on loans to euro area households and NFCs. In order to underpin the effectiveness of the TLTROs in supporting lending to the private sector, the Governing Council decided at its January meeting that the interest rate for the remaining TLTROs would be equal to the rate on the Eurosystem s main refinancing operations, thus removing the 10 basis point spread over the MRO rate that applied to the first two TLTROs. The ECB s monetary policy measures appear to have also promoted a narrowing of the cross-country dispersion of borrowing costs, especially for NFCs, although credit conditions remain heterogeneous across countries. The nominal cost of non-bank external finance for euro area NFCs continued to decrease in the fourth quarter of 2014 and in the first two months of 2015, as a result of a further decline in both the cost of market-based debt and the cost of equity. ECB Economic Bulletin Issue 2 / 2015 5 Recent data also indicate a firming of money and credit dynamics. Annual growth in the broad monetary aggregate M3 is still supported by its most liquid components, with the narrow monetary aggregate M1 growing robustly. Bank lending to the private sector has continued to recover, confirming the occurrence of a turnaround in loan dynamics at the beginning of 2014. In particular, the decline in loans to NFCs has continued to moderate over recent months, while the growth of loans to households has stabilised at positive levels. Moreover, the January 2015 euro area bank lending survey confirmed the assessment that credit supply constraints were gradually receding and demand for loans was recovering. Overall, recent developments suggest that the ECB s monetary policy measures are contributing to an easing of bank lending conditions and, more generally, to restoring the proper functioning of the monetary policy transmission mechanism. The substantial additional easing of the ECB s monetary policy stance supports and reinforces the emergence of more favourable developments in euro area economic activity. The economic recovery firmed gradually in the second half of 2014. Real GDP increased by 0.2%, quarter on quarter, in the third quarter of the year, and, according to Eurostat s flash estimate, by 0.3% in the fourth quarter, which was somewhat higher than previously expected. Short-term indicators and survey results point to a further improvement in economic activity at the beginning of 2015. It appears that euro area activity has been supported by the significant fall in oil prices since July 2014. An environment of improving business and consumer sentiment will support the effective transmission of the policy measures to the real economy, contributing to a further improvement in the outlook for economic growth and a reduction in economic slack. The economic recovery is expected to strengthen and broaden gradually. Growth in activity is expected to increase on account of the recent improvements in business and consumer confidence, the sharp fall in oil prices, the weakening of the effective exchange rate of the euro and the impact of the ECB s recent monetary policy measures. The accommodative monetary policy stance   substantially reinforced by the APP   is expected to support real GDP growth in both the short term and beyond. Furthermore, the progress made in structural reforms and fiscal consolidation should gradually benefit the real economy. Exports should be supported by gains in price competitiveness and the global recovery. At the same time, several obstacles to a stronger pick-up in activity persist. These include primarily the ongoing balance sheet adjustments in various sectors and the rather slow pace at which structural reforms are being implemented. In addition, diminishing but ongoing uncertainty related to the European sovereign debt crisis and geopolitical factors are dampening growth in the euro area. The March 2015 ECB staff macroeconomic projections for the euro area,1 which incorporate the estimated impact of both standard and non-standard monetary policy measures taken by the Governing Council, foresee annual real GDP increasing by 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017. Compared with the December 2014 Eurosystem staff macroeconomic projections, the forecasts for real GDP growth in 2015 and 2016 have been revised upwards, reflecting the favourable impact of lower oil prices, a weaker effective exchange rate of the euro and the impact of the recent monetary policy measures. In the Governing Council s assessment, risks to the outlook for activity remain on the downside, although they have diminished following the Governing Council s latest