European Central Bank — Economic Bulletin (Europe, 2020)

Economic Bulletin Issue 7 / 2020 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 A revised weighting scheme for the international environment projections New euro area statistics on insurance corporations  premiums, claims and expenses Consumption patterns and inflation measurement issues during the COVID-19 pandemic Articles 1 2 3 The impact of COVID-19 on potential output in the euro area European financial integration during the COVID-19 crisis New pension fund statistics Statistics 2 2 5 9 12 17 21 25 25 30 34 42 42 62 85 S1 ECB Economic Bulletin, Issue 7 / 2020   Contents 1 Update on economic and monetary developments Summary The resurgence in coronavirus (COVID-19) infections presents renewed challenges to public health and the growth prospects of the euro area and global economies. Incoming information signals that the euro area economic recovery is losing momentum more rapidly than expected, after a strong, yet partial and uneven, rebound in economic activity over the summer months. The rise in COVID-19 cases and the associated intensification of containment measures is weighing on activity, constituting a clear deterioration in the near-term outlook. Incoming data for the global economy point to a fast rebound of global activity in the third quarter, but also to slowing momentum. After a sharp contraction in the first half of 2020, the global composite output Purchasing Managers  Index (excluding the euro area) and high-frequency indicators rebounded considerably in the third quarter, albeit stabilising in September. In addition to weak labour market prospects, uncertainty is weighing on consumer behaviour. Global trade also recovered sharply in the third quarter, following the sharp and deep contraction in the second quarter. Global inflation remained low. Over the review period, the forward curve of the euro overnight index average (EONIA) shifted slightly downwards and remained mildly inverted. Despite the inversion, the curve does not suggest firm market expectations of an imminent rate cut. Long-term sovereign bond spreads declined steadily across euro area countries, amid expectations of further monetary policy and fiscal support. Equity price indices significantly declined, amid sizeable intra-period movement. In foreign exchange markets, the euro remained broadly stable in trade-weighted terms. The latest data point to a strong rebound in output in the euro area in the third quarter of 2020, following the sharp contraction of 11.8%, quarter on quarter, in the second quarter. However, the ongoing increases in coronavirus infection rates constitute a headwind to the short-term outlook and will, in all likelihood, lead to a significant softening in output growth in the final quarter of the year, as already indicated by recent surveys. At the same time, the recovery continues to be uneven across sectors, with the services sector being the hardest hit by the pandemic, in part as a result of its sensitivity to social distancing measures. Looking further ahead, a sustained recovery remains highly dependent on the course the pandemic takes and the success of the containment policies. While the uncertainty related to the evolution of the pandemic will likely dampen the strength of the recovery in the labour market and in consumption and investment, the euro area economy should continue to be supported by favourable financing conditions, an expansionary fiscal stance and a gradual strengthening of global activity and demand. ECB Economic Bulletin, Issue 7 / 2020   Update on economic and monetary developments Summary 2 Euro area annual HICP inflation decreased to -0.3% in September, from -0.2% in August, reflecting developments in the prices of energy, non-energy industrial goods and services. On the basis of current and futures prices for oil and taking into account the temporary reduction in German VAT, headline inflation is likely to remain negative until early 2021. Moreover, near-term price pressures will remain subdued owing to weak demand, notably in the tourism and travel-related sectors, as well as to lower wage pressures and the appreciation of the euro exchange rate. Over the medium term, a recovery in demand supported by accommodative monetary and fiscal policies will put upward pressure on inflation. Market-based indicators and survey-based measures of longer-term inflation expectations remain broadly unchanged at low levels. The coronavirus pandemic has continued to influence significantly money and credit dynamics in the euro area. Money growth increased further in September 2020 and domestic credit, which continued to be the main source of money creation, was increasingly supported by the Eurosystem s net purchases of government bonds. The timely and sizeable measures taken by monetary, fiscal and supervisory authorities since the outbreak of the pandemic have continued to underpin the extension of bank credit on favourable terms to the euro area economy. However, as evidenced by the October 2020 euro area bank lending survey, banks tightened their credit standards on loans to firms and households in the third quarter of 2020 on account of heightened risk perceptions. The monetary policy measures that the Governing Council has taken since early March are helping to preserve favourable financing conditions for all sectors and jurisdictions across the euro area, thereby providing crucial support to underpin economic activity and to safeguard medium-term price stability. At the same time, in the current environment of risks clearly tilted to the downside, the Governing Council will carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate. The new round of Eurosystem staff macroeconomic projections in December will allow a thorough reassessment of the economic outlook and the balance of risks. On the basis of this updated assessment, the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation and to ensure that financing conditions remain favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path. This will foster the convergence of inflation towards its aim in a sustained manner, in line with its commitment to symmetry. In the meantime, the Governing Council decided to reconfirm its accommodative monetary policy stance. The Governing Council will keep the key ECB interest rates unchanged. They are expected to remain at their present or lower levels until the inflation outlook robustly converges to a level sufficiently close to, but below, 2% within the projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. ECB Economic Bulletin, Issue 7 / 2020   Update on economic and monetary developments Summary 3 The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of  1,350 billion. These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy. The Governing Council will conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, until it judges that the coronavirus crisis phase is over. The Governing Council will reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2022. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance. Net purchases under the asset purchase programme (APP) will continue at a monthly pace of  20 billion, together with the purchases under the additional  120 billion temporary envelope until the end of the year. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of policy rates, and to end shortly before the Governing Council starts raising the key ECB interest rates. The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. The Governing Council will also continue to provide ample liquidity through its refinancing operations. In particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households. ECB Economic Bulletin, Issue 7 / 2020   Update on economic and monetary developments Summary 4 1 External environment Incoming data point to a fast rebound of global activity in the third quarter, but also to momentum slowing down afterwards. After a sharp contraction in the first half of 2020, the global composite output PMI (excluding the euro area) rebounded considerably during the third quarter, to 51.8 compared to 37.9 in the previous quarter. However, it remained unchanged in September, as the marginal improvement in service