European Central Bank — Economic Bulletin (Europe, 2024)

Economic Bulletin Issue 2 / 2024 Contents Economic, financial and monetary developments Overview External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments Fiscal developments 1 2 3 4 5 6 Boxes 1 2 3 4 5 6 7 8 Speculation in oil and gas prices in times of geopolitical risks How geopolitics is changing trade How have households adjusted their spending and saving behaviour to cope with high inflation? What were the drivers of euro area food price inflation over the last two years? An update on the accuracy of recent Eurosystem/ECB staff projections for short-term inflation Liquidity conditions and monetary policy operations from 1 November 2023 to 30 January 2024 The euro as a global currency: a payments perspective The ECB s climate and nature plan 2024-2025 Articles 1 2 The impact of recent shocks and ongoing structural changes on euro area productivity growth Is there a digital divide in payments? Understanding why cash remains important for so many Box 1 Unbanked beyond the euro area: do digital ownership patterns differ abroad? Statistics ECB Economic Bulletin, Issue 2 / 2024   Contents 2 2 7 13 20 27 33 40 43 43 49 54 60 66 73 79 83 88 88 110 120 S1 1 Economic, financial and monetary developments Overview At its meeting on 7 March 2024, the Governing Council decided to keep the three key ECB interest rates unchanged. Since its monetary policy meeting on 25 January 2024, inflation has declined further. In the March 2024 ECB staff macroeconomic projections for the euro area, inflation has been revised down, in particular for 2024 which mainly reflects a lower contribution from energy prices. Staff now project inflation to average 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. The projections for inflation excluding energy and food have also been revised down and average 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages. Financing conditions are restrictive and the past interest rate increases continue to weigh on demand, which is helping push down inflation. Staff have revised down their growth projection for 2024 to 0.6%, with economic activity expected to remain subdued in the near term. Thereafter, staff expect the economy to pick up and to grow at 1.5% in 2025 and 1.6% in 2026, supported initially by consumption and later also by investment. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. Economic activity The economy remains weak. Consumers continued to hold back on their spending, investment moderated and companies exported less, reflecting a slowdown in external demand and some losses in competitiveness. However, surveys point to a gradual recovery over the course of 2024. As inflation falls and wages continue to grow, real incomes will rebound, supporting growth. In addition, the dampening impact of past interest rate increases will gradually fade and demand for euro area exports should pick up. ECB Economic Bulletin, Issue 2 / 2024   Economic, financial and monetary developments Overview 2 The unemployment rate is at its lowest since the start of the euro. Employment grew by 0.3% in the final quarter of 2023, again outpacing economic activity. As a result, output per person declined further. Meanwhile, employers are posting fewer job vacancies, and fewer firms are reporting that their production is being limited by labour shortages. According to the March 2024 projections, economic growth is projected to gradually pick up during 2024 as real disposable income rises, amid declining inflation and robust wage growth, and as the terms of trade improve. With the current shipping disruptions in the Red Sea unlikely to cause significant renewed supply constraints, export growth is expected to catch up with strengthening foreign demand. Over the medium term the recovery is seen to also be supported by the gradual fading of the impact from the ECB s monetary policy tightening. Overall, annual average real GDP growth is expected to be 0.6% in 2024, and to strengthen to 1.5% in 2025 and 1.6% in 2026. Compared with the December 2023 Eurosystem staff macroeconomic projections for the euro area, the outlook for GDP growth has been revised down for 2024, owing to carry-over effects from past negative data surprises and weaker incoming forward-looking information, it is unrevised for 2025 and has been revised slightly up for 2026. Governments should continue to roll back energy-related support measures to allow the disinflation process to proceed sustainably. Fiscal and structural policies should be strengthened to make the euro area economy more productive and competitive, expand supply capacity and gradually bring down high public debt ratios. A speedier implementation of the Next Generation EU programme and more determined efforts to remove national barriers to deeper and more integrated banking and capital markets can help increase investment in the green and digital transitions and reduce price pressures in the medium term. The EU s revised economic governance framework should be implemented without delay. Inflation Inflation edged down to 2.8% in January and, according to Eurostat s flash estimate, declined further to 2.6% in February. Food price inflation fell again, to 5.6% in January and 4.0% in February, while energy prices in both months continued to decline compared with a year ago but at a lower rate than in December. Goods price inflation also fell further, to 2.0% in January and 1.6% in February. Services inflation, after remaining at 4.0% for three months in a row, edged lower to 3.9% in February. Most measures of underlying inflation declined further in January as the impact of past supply shocks continued to fade and tight monetary policy weighed on demand. However, domestic price pressures are still elevated, in part owing to robust wage growth and falling labour productivity. At the same time, there are signs that growth in wages is starting to moderate. In addition, profits are absorbing part of the rising labour costs, which reduces the inflationary effects. Inflation is expected to continue this downward trend in the coming months. Further ahead, it is expected to decline to the Governing Council s target as labour costs ECB Economic Bulletin, Issue 2 / 2024   Economic, financial and monetary developments Overview 3 moderate and the effects of past energy shocks, supply bottlenecks and the reopening of the economy after the pandemic fade. Measures of longer-term inflation expectations remain broadly stable, with most standing around 2%. According to the March 2024 projections, inflation is projected to moderate further owing to the ongoing easing of pipeline pressures and the impact of monetary policy tightening, albeit at a more modest pace than seen in 2023. Pipeline price pressures should continue to fade with the shipping disruptions in the Red Sea expected to have only a limited upward impact. As energy prices decline, strong labour cost developments should be the dominant driver of inflation excluding energy and food. Nominal wage growth is set to remain elevated, driven by persistent tightness in the labour market, but it should gradually ease over the projection horizon as upward impacts from inflation compensation fade. A recovery in productivity growth should support the moderation in labour cost pressures. Profit growth is set to weaken over the projection horizon and provide a buffer to the pass-through of labour costs. Overall, annual average headline inflation is expected to decrease from 5.4% in 2023 to 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. Given the weak outlook for energy inflation, headline inflation is expected to remain below inflation excluding energy and food throughout the projection horizon. Compared with the December 2023 projections, headline inflation has been revised down for 2024 and 2025, mainly owing to the direct and indirect effects from lower assumptions for energy commodity prices and lower labour cost pressures, and is unrevised for 2026. Risk assessment The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy or a further slowdown in global trade would also weigh on euro area growth. Russia s unjustified war against Ukraine and the tragic conflict in the Middle East are major sources of geopolitical risk. This may result in firms and households becoming less confident about the future and global trade being disrupted. Growth could be higher if inflation comes down more quickly than expected and rising real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected. Upside risks to inflatio