European Central Bank — Economic Bulletin (Europe, 2015)

Economic Bulletin Issue 8 / 2015 30 53%100%3,5E7,5E6EEEE80 6E6EE 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 1 2 Liquidity conditions and monetary policy operations in the period from 22 July to 27 October 2015 What is behind the low investment in the euro area? Responses from a survey of large euro area firms 3 The role of base effects in the projected path of HICP inflation 4 Downward wage rigidity and the role of structural reforms in the euro area 5 Wages, productivity and competitiveness: a granular approach 6 The creation of competitiveness boards in the context of striving towards a genuine economic union 7 Review of draft budgetary plans for 2016 Articles 1 What is behind the recent rebound in euro area employment? 2 New features in monetary and financial statistics Statistics 3 7 12 15 20 24 28 31 35 38 40 44 47 50 54 72 S1 2 ECB Economic Bulletin, Issue 8 / 2015   Contents Economic and monetary developments Overview At its monetary policy meeting on 3 December 2015, the Governing Council re-examined the degree of monetary policy accommodation: the analysis confirmed the need for further monetary stimulus in order to secure a return of inflation rates towards levels that are below, but close to, 2%. The December 2015 Eurosystem staff macroeconomic projections indicated continued downside risks to the inflation outlook and slightly weaker inflation dynamics than previously expected. This followed downward revisions in earlier projection exercises. The Governing Council noted that the persistence of low inflation rates reflected sizeable economic slack weighing on domestic price pressures and headwinds from the external environment, and that the staff projections already incorporated the favourable financial market developments following the October monetary policy meeting. The main economic developments prevailing at the time of the Governing Council s December meeting are summarised in the following paragraphs, followed by further detail on the decisions taken at the meeting. Economic assessment at the time of the Governing Council meeting of 3 December 2015 Global economic activity remains on a gradual and uneven recovery path. The outlook for advanced economies is supported by low oil prices, still favourable financing conditions, improving labour markets, growing confidence and the receding headwinds of private sector deleveraging and fiscal consolidation. By contrast, growth prospects in emerging market economies continue to be restrained by structural impediments and macroeconomic imbalances. In some countries, this is amplified by a tightening in global financial conditions and the fall in commodity prices. Global inflationary pressures are expected to remain contained following the decline in oil prices and the still abundant global spare capacity. In the run-up to the December Governing Council meeting, euro area financial market conditions were affected by expectations of further monetary policy easing. These expectations led to significant declines in sovereign bond yields across euro area countries. Equity markets in the euro area strengthened significantly. The euro depreciated, in part reflecting market expectations of monetary policy action. The economic recovery in the euro area is increasingly supported by domestic demand. Real GDP increased by 0.3%, quarter on quarter, in the third quarter of 2015, following a rise of 0.4% in the previous quarter, on account of a continued 3 ECB Economic Bulletin, Issue 8 / 2015   Economic and monetary developments positive contribution from consumption alongside more muted developments in investment and exports. The most recent survey indicators point to ongoing real GDP growth in the final quarter of 2015. Looking ahead, the economic recovery is expected to proceed, although risks remain on the downside. 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 earlier progress made with fiscal consolidation and structural reforms. Moreover, low oil prices should provide support for households  real disposable income and corporate profitability and, therefore, private consumption and investment. In addition, government expenditure is likely to increase in some parts of the euro area, reflecting measures in support of refugees. However, the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets and moderate global trade, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms. The risks to the euro area growth outlook remain on the downside and relate in particular to the heightened uncertainties regarding developments in the global economy as well as to broader geopolitical risks. These risks have the potential to weigh on global growth and foreign demand for euro area exports and on confidence more widely. The December 2015 Eurosystem staff macroeconomic projections for the euro area foresee annual real GDP increasing by 1.5% in 2015, 1.7% in 2016 and 1.9% in 2017. Compared with the September 2015 ECB staff macroeconomic projections, the prospects for real GDP growth are broadly unchanged. HICP inflation has increased somewhat, but remains low. According to Eurostat s flash estimate, euro area annual HICP inflation was 0.1% in November 2015, unchanged from October but lower than expected. HICP inflation excluding food and energy declined to 0.9% in November after having increased to 1.1% in October. Annual HICP inflation rates are expected to rise in the period ahead. They are expected to increase at the turn of the year, mainly on account of base effects associated with the fall in oil prices in late 2014. During 2016 and 2017, inflation rates are foreseen to pick up further, supported by the ECB s previous monetary policy measures   and supplemented by those announced in December 2015   the expected economic recovery, and the pass-through of past declines in the euro exchange rate. The Governing Council will closely monitor the evolution of inflation rates over the period ahead. The December 2015 Eurosystem staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.1% in 2015, 1.0% in 2016 and 1.6% in 2017. In comparison with the September 2015 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised down slightly. The ECB s past monetary policy measures have contributed to improvements in money and credit indicators, and the transmission of monetary policy more generally. Broad money growth remains solid and loan growth is recovering, albeit gradually. Banks  funding costs have stabilised close to their historical lows, and banks have gradually been passing on declines in these costs in the form 4 ECB Economic Bulletin, Issue 8 / 2015   Economic and monetary developments of reduced lending rates. More favourable lending conditions have continued to support a recovery in loan growth, while cross-country heterogeneity in bank lending rates has declined further. Monetary policy decisions and communication At its December meeting, the Governing Council conducted a thorough assessment of 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. The analysis confirmed the need for further monetary stimulus in order to secure a return of inflation rates to these levels. As a result, the Governing Council took the following decisions in the pursuit of its price stability objective.   First, as regards the key ECB interest rates, the Governing Council decided to lower the interest rate on the deposit facility by 10 basis points to -0.30%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their levels of 0.05% and 0.30% respectively.   Second, as regards non-standard monetary policy measures, the Governing Council decided to extend the asset purchase programme (APP). The monthly purchases of  60 billion under the APP are now intended to run until the end of March 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 aim of achieving inflation rates below, but close to, 2% over the medium term.       Third, the Governing Council decided to reinvest the principal payments on the securities purchased under the APP as they mature, for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance. Fourth, the Governing Council decided to include, in the public sector purchase programme, euro-denominated marketable debt instruments issued by regional and local governments located in the euro area in the list of assets that are eligible for regular purchases by the respective national central banks. Fifth, the Governing Council decided to continue conducting the main refinancing operations and three-month longer-term refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2017. The decisions were taken in order to secure a return of inflation rates towards levels that are below, but close to, 2% and thereby to anchor medium-term inflation expectations. The new measures will ensure accommodative financial conditions and further strengthen the substantial easing impact of the measures 5