European Central Bank — Economic Bulletin (Europe, 2019)

Economic Bulletin Issue 4 / 2019 Contents Economic and monetary developments Overview 1 2 3 4 5 6 External environment Financial developments Economic activity Prices and costs Money and credit Fiscal developments Boxes 1 2 3 4 5 Articles 1 2 Statistics The decrease in euro area net financial outflows in 2018: foreign direct investment retrenchment and portfolio investment slowdown Liquidity conditions and monetary policy operations in the period from 30 January to 16 April 2019 Definitions and characteristics of soft patches in the euro area Confidence and investment Rent inflation in the euro area since the crisis The euro area labour market through the lens of the Beveridge curve Drivers of underlying inflation in the euro area over time: a Phillips curve perspective 2 2 6 14 19 24 29 37 40 40 46 52 57 61 66 66 87 S1 ECB Economic Bulletin, Issue 4 / 2019   Contents 1 Economic and monetary developments Overview Based on a thorough assessment of the economic and inflation outlook for the euro area, also taking into account the latest staff macroeconomic projections, the Governing Council took a series of monetary policy decisions at its monetary policy meeting on 6 June to support the convergence of inflation towards levels of below, but close to, 2%. Despite the somewhat better than expected data for the first quarter, the most recent information indicates that global headwinds continue to weigh on the euro area outlook. The prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets, is leaving its mark on economic sentiment. At the same time, further employment gains and increasing wages continue to underpin the resilience of the euro area economy and gradually rising inflation. Against this overall background, the Governing Council decided to keep the key ECB interest rates unchanged and adjust its forward guidance on the key ECB rates to indicate its expectation that they will remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. It also reiterated its forward guidance on reinvestments. And, finally, it decided upon the modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III), most notably their pricing parameters. The Governing Council also assessed that, at this point in time, the positive contribution of negative interest rates to the accommodative monetary policy stance and to the sustained convergence of inflation is not undermined by possible side effects on bank-based intermediation. However, the Governing Council will continue to monitor carefully the bank-based transmission channel of monetary policy and the case for mitigating measures. Economic and monetary assessment at the time of the Governing Council meeting of 6 June 2019 Underlying global growth momentum continued to soften in early 2019, notwithstanding better than expected data in some key advanced economies. Survey-based indicators signal continued weakness in global manufacturing activity, despite some recent stabilisation at low levels, and a recent deterioration in activity in the service sector following a period of relative resilience. Global growth is projected to decelerate this year amid high and rising policy and political uncertainty, which is weighing on global investment, and the renewed intensification of trade tensions between the United States and China. While those headwinds are expected to continue to weigh on global activity and trade this year, recent policy measures are expected to provide some support thereafter. As a result, global growth is projected to decrease in 2019, but to stabilise over the medium term. Global trade is expected to weaken more significantly this year and to grow in line with economic activity in the ECB Economic Bulletin, Issue 4 / 2019   Economic and monetary developments Overview 2 medium term. Global inflationary pressures are expected to remain contained, while downside risks to global economic activity have intensified. Long-term risk-free rates have declined since the Governing Council s meeting in March 2019 amid market expectations of continued accommodative monetary policy and a resurgence of trade tensions. Non-financial equity prices have increased slightly, exhibiting some volatility, supported by low risk-free rates and improving earnings expectations. However, uncertainty related to resurgent trade tensions is weighing on the prices of risky assets. In foreign exchange markets, the euro has broadly appreciated in trade-weighted terms. Euro area real GDP growth increased in the first quarter of 2019 to 0.4% quarter on quarter, following the slowdown in the second half of last year against the background of a weaker trend in euro area external demand. However, incoming economic data and survey information point to somewhat weaker growth in the second and third quarters of this year. This reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are weighing, in particular, on the euro area manufacturing sector. At the same time, the euro area services and construction sectors are showing resilience and the labour market is continuing to improve. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, the mildly expansionary euro area fiscal stance, further employment gains and rising wages, and the ongoing   albeit somewhat slower   growth in global activity. This assessment is broadly reflected in the June 2019 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.2% in 2019, 1.4% in 2020 and 1.4% in 2021. Compared with the March 2019 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised up by 0.1 percentage points for 2019 and has been revised down by 0.2 percentage points for 2020 and by 0.1 percentage points for 2021. The risks surrounding the euro area growth outlook remain tilted to the downside on account of the prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets. According to Eurostat s flash estimate, euro area annual HICP inflation was 1.2% in May 2019, after 1.7% in April, reflecting mainly lower energy and services price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months, before rising again towards the end of year. Measures of underlying inflation remain generally muted, but labour cost pressures continue to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by the ECB s monetary policy measures, the ongoing economic expansion and stronger wage growth. This assessment is also broadly reflected in the June 2019 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.3% in 2019, 1.4% in 2020 and 1.6% in 2021. Compared with the March 2019 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised up by 0.1 percentage points for 2019 and revised down by 0.1 percentage ECB Economic Bulletin, Issue 4 / 2019   Economic and monetary developments Overview 3 points for 2020. Annual HICP inflation excluding energy and food is expected to be 1.1% in 2019, 1.4% in 2020 and 1.6% in 2021. The annual growth of broad money and loans to the private sector increased in April 2019. Broad money (M3) growth stood at 4.7% in April 2019, after 4.6% in March. Sustained rates of broad money growth reflect ongoing bank credit creation for the private sector and low opportunity costs of holding M3. Furthermore, M3 growth remained resilient in the face of the fading out of the mechanical contribution of the net purchases under the asset purchase programme (APP). At the same time, lending conditions remained favourable; the annual growth rate of loans to non-financial corporations increased to 3.9% in April 2019 from 3.6% in March. The monetary policy measures decided by the Governing Council, including TLTRO III, will help to safeguard favourable bank lending conditions and will continue to support access to financing, in particular for small and medium-sized enterprises. The aggregate fiscal stance for the euro area is projected to continue to be mildly expansionary, thereby providing support to economic activity. This profile is mainly driven by cuts in direct taxes and social security contributions in Germany and France, but also by relatively dynamic expenditure growth in several other countries. Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council made the following decisions:       First, the key ECB interest rates were kept unchanged. The Governing Council now expects them to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Second, the Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme 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 m