European Central Bank — Economic Bulletin (Europe, 2015)

Economic Bulletin Issue 7 / 2015 30 53%100%3,5E7,5E6EEEE80 6E6EE Contents Update on economic and monetary developments Summary 1 External environment 2 Financial developments 3 Economic activity 4 Prices and costs 5 Money and credit Boxes 1 Trade links between the euro area and China 2 3 4 Explaining the drivers of the recent increase in oil price volatility An assessment of recent euro area consumption growth New data on loans to the private sector adjusted for sales and securitisation 5 The creation of a European Fiscal Board articles 1 2 3 The transmission of the ECB s recent non-standard monetary policy measures The short-term fiscal implications of structural reforms European statistics: cooperation between the European System of Central Banks and the European Statistical System Statistics 3 5 7 8 10 12 16 20 23 25 28 32 52 71 S1 2 ECB Economic Bulletin, Issue 7 / 2015   Contents Update on economic and monetary developments Summary Global economic activity remained moderate in the third quarter of 2015, with substantial divergence across major economies. Growth momentum in the United States and the United Kingdom appeared to slow, following a strengthening in activity in the second quarter, while momentum in Japan remained relatively subdued. In China, data for the third quarter remain consistent with a gradual slowdown in the economy. In emerging market economies, the past fall in commodity prices has led to a divergence in growth between commodity-importing and commodity-exporting countries. Global trade remains weak, while global headline inflation has stabilised at low levels in recent months. Euro area financial markets have continued to show some volatility. Government bond yields have declined significantly across all euro area countries, with the ten-year GDP-weighted euro area sovereign bond yield falling by around 30 basis points from the beginning of September to 1.16% on 21 October. Stock market prices in the euro area were around 2% higher at the end of this period, despite recording significant price movements and temporarily falling by around 6%. The effective exchange rate of the euro remained broadly stable. In spite of a less supportive external environment, the euro area economic recovery is proceeding, increasingly supported by domestic factors, in particular private consumption. Real GDP rose by 0.4% quarter on quarter in the second quarter of 2015, following a rise of 0.5% in the previous quarter. The most recent indicators point to a broadly similar pace of growth in the third quarter. Looking ahead, the economic recovery is expected to continue, albeit dampened by weaker than expected foreign demand. Domestic demand should be further supported by the ECB s monetary policy measures and their favourable impact on financial conditions, as well as by the progress made with fiscal consolidation and structural reforms. Moreover, the decline in oil prices should bolster households  real disposable income and corporate profitability, thus supporting private consumption and investment. However, the risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties regarding developments in emerging market economies, which have the potential to further weigh on global growth and foreign demand for euro area exports. The increased uncertainty that has recently manifested itself in financial market developments may also have negative repercussions for euro area domestic demand. Reflecting declining energy prices, headline inflation dipped back into negative territory in September, standing at -0.1%, while HICP inflation excluding energy remained stable at 0.9%. On the basis of the available information and current oil futures prices, annual HICP inflation is expected to remain very low in the near term, but rise at the turn of the year, mainly on account of base effects linked to the fall 3 ECB Economic Bulletin, Issue 7 / 2015   Update on economic and monetary developments in oil prices in late 2014. Inflation rates are foreseen to pick up further during 2016 and 2017, supported by the expected economic recovery, the pass-through of past declines in the euro exchange rate and the assumption embedded in oil futures markets of somewhat higher oil prices in the years ahead. However, there are risks stemming from the economic outlook and from financial and commodity market developments which could further slow down the gradual increase in inflation rates towards levels closer to 2%. Despite some moderation, broad money growth remained robust in August and continued to be driven by its most liquid components. Domestic sources of money creation were again of increasing importance, partly as a result of the ECB s non- standard monetary policy measures. Ongoing shifts away from longer-term financial liabilities and increased credit flows were visible, with the latter reflecting the impact of the expanded asset purchase programme (APP). Meanwhile, loan dynamics remained on a path of gradual recovery, despite being hampered in some countries. Bank lending rates for non-financial corporations declined further in August, with the ECB s non-standard measures making a notable contribution to this improvement. Moreover, the October 2015 euro area bank lending survey suggests that changes in credit standards and loan demand are continuing to support a recovery in loan growth. At its meeting on 22 October 2015, based on its regular economic and monetary analyses and in line with its forward guidance, the Governing Council decided to keep the key ECB interest rates unchanged. As regards non-standard monetary policy measures, the asset purchases are proceeding smoothly and continue to have a favourable impact on the cost and availability of credit for firms and households. The Governing Council stressed that the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis. The risks to inflation outlook are being closely monitored by the Governing Council. In this context, the degree of monetary policy accommodation will be re-examined at the December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available. The Governing Council emphasised that it is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation. In particular, it recalled that the APP provides sufficient flexibility in terms of adjusting its size, composition and duration, and said that, in the meantime, the monthly asset purchases of  60 billion will continue to be fully implemented. These purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with the ECB s aim of achieving inflation rates below, but close to, 2% over the medium term. 4 ECB Economic Bulletin, Issue 7 / 2015   Update on economic and monetary developments 1 External environment global indicators suggest that world real gDP growth remained moderate in the third quarter of 2015, with substantial divergence across major economies. The global composite output Purchasing Managers  Index (PMI) excluding the euro area fell slightly in the third quarter and remained below its long-term average (see Chart 1), pointing to continued moderate GDP growth. Developments diverged somewhat across advanced economies, although quarterly composite output PMIs in the United States, United Kingdom and Japan remained close to or above their long-term averages. Meanwhile, PMIs in the emerging market economies (EMEs) continued to weigh on the global index, with notable weakness in the quarterly output PMI in Brazil in the third quarter. global trade remains weak. For the first time since 2009 global trade growth turned negative in the first half of 2015. In the third quarter the volume of world merchandise imports stabilised in July 2015, with flat growth on a three-month-on- three-month basis, up from -0.5% in June. The global trade outlook remains weak, however, as suggested by the further decline in the global PMI for new export orders in September, with the index remaining below the threshold of 50 for the third consecutive month. global headline inflation has stabilised at a low level in recent months. Annual inflation in OECD countries has remained unchanged at 0.6% since May 2015. Excluding food and energy, annual inflation in OECD countries also remained stable at 1.7% in August. Among major non-OECD economies, inflation fell in China and Chart 1 Global composite output PMI (diffusion index; deviations from long-term average) Q1 2015 Q2 2015 Q3 2015 6 4 2 0 -2 -4 -6 -8 -10 World excluding EA EA US JP UK CN IN RU BR Sources: Markit and ECB calculations. Notes: Long-term averages refer to the period from 1999 or, if the data start later, from the   rst available observation onwards. The data is available from September 2007 for Japan, November 2005 for China, December 2005 for India, October 2001 for Russia and March 2007 for Brazil. Brazil, while it increased marginally in Russia. In Russia and Brazil, inflation is still high, reflecting the upward impact of currency depreciation on import prices. growth in US activity appears to have softened in the third quarter of 2015, following a strong rebound in the second quarter. Real GDP was robust in the second quarter, growing by 1.0% quarter on quarter (up from 0.2% in the previous quarter). Consumption expenditure continued to be the main engine of gro