European Central Bank — Economic Bulletin (Europe, 2018)

Economic Bulletin Issue 2 / 2018 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 6 7 8 Are the recent oil price increases set to last? Euro area sovereign bond market liquidity since the start of the PSPP Liquidity conditions and monetary policy operations in the period from 1 November 2017 to 30 January 2018 Recent developments in part-time employment The reliability of the preliminary flash estimate of euro area GDP The role of seasonality and outliers in HICP inflation excluding food and energy Fiscal policy stance during past periods of expansion The European Commission s 2018 assessment of macroeconomic imbalances and progress on reforms Articles 1 2 The real effects of credit constraints The economic impact of population ageing and pension reforms Statistics ECB Economic Bulletin, Issue 2 / 2018 Contents 2 2 5 11 16 23 28 34 36 36 41 45 50 55 59 63 69 73 73 85 S1 1 Economic and monetary developments Overview At its monetary policy meeting on 8 March 2018, the Governing Council concluded that an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term. The information that has become available since the previous monetary policy meeting in January, including the new ECB staff projections, confirmed a strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near term at a somewhat faster pace than previously expected. This outlook for growth confirmed the Governing Council s confidence that inflation will converge towards the inflation aim of below, but close to, 2% over the medium term. At the same time, measures of underlying inflation remained subdued and have yet to show convincing signs of a sustained upward trend. In this context, the Governing Council will continue monitoring developments in the exchange rate and financial conditions with regard to their possible implications for the medium-term outlook for price stability. The continued monetary support required for a sustained return of inflation rates towards levels that are below, but close to, 2% is provided by the ongoing net asset purchases, by the sizeable stock of acquired assets and the forthcoming reinvestments, and by the forward guidance on interest rates. Economic and monetary assessment at the time of the Governing Council meeting of 8 March 2018 The global economy expanded at an even faster rate in the second half of 2017 and is providing further impetus to euro area exports. Global economic activity is expected to remain strong going forward, although the pace of growth will gradually moderate. Global trade growth is expected to remain sustained in the near term, while inflation is expected to rise slowly as spare capacity at the global level diminishes. Amid the ongoing economic expansion, euro area sovereign bond yields have increased since mid-December 2017. However, corporate bond spreads have remained broadly stable and average sovereign bond spreads over the overnight index swap rate have decreased somewhat overall. Equity prices have declined in an environment of heightened volatility. In foreign exchange markets, the euro has appreciated in nominal effective terms. The euro area economic expansion continues to be strong and broad-based across countries and sectors, with real GDP increasing by 0.6% quarter on quarter in the fourth quarter of 2017. Private consumption is supported by rising employment, which is also benefiting from past labour market reforms, and by growing household wealth. Business investment has continued to strengthen on the ECB Economic Bulletin, Issue 2 / 2018   Economic and monetary developments Overview 2 back of very favourable financing conditions, rising corporate profitability and solid demand, while housing investment has improved further over recent quarters. In addition, the broad-based global expansion is providing impetus to euro area exports. This assessment is also broadly reflected in the March 2018 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP in the euro area increasing by 2.4% in 2018, 1.9% in 2019 and 1.7% in 2020. Compared with the December 2017 Eurosystem staff macroeconomic projections, the outlook for GDP growth has been revised up in 2018 and remains unchanged thereafter. Risks surrounding the growth outlook are assessed as broadly balanced. On the one hand, the prevailing cyclical momentum could lead to stronger growth in the near term. On the other hand, downside risks continue to relate primarily to global factors, including rising protectionism and developments in foreign exchange and other financial markets. According to Eurostat s flash estimate, euro area annual HICP inflation decreased to 1.2% in February, from 1.3% in January. This reflected mainly negative base effects in unprocessed food price inflation. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around 1.5% for the remainder of the year. Measures of underlying inflation remained subdued but are expected to rise gradually over the medium term, supported by the ECB s monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth. The March 2018 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation at 1.4% in 2018, 1.4% in 2019 and 1.7% in 2020. Compared with the December 2017 Eurosystem staff macroeconomic projections, the outlook for headline HICP inflation has been revised down slightly for 2019 but remains unchanged for 2018 and 2020. Declines in HICP energy inflation in 2018 and 2019 are expected to broadly offset a strengthening in underlying inflation, with HICP inflation excluding energy and food rising from 1.1% in 2018 to 1.5% in 2019 and 1.8% in 2020. The latest staff projections also foresee the euro area budget deficit declining further over the projection horizon, mainly as a result of favourable cyclical conditions and decreasing interest payments. The aggregate fiscal stance for the euro area is projected to remain on average broadly neutral in 2018-20. Although the euro area government debt-to-GDP ratio will continue to decline, it will still remain elevated. The current economic expansion calls for rebuilding fiscal buffers. The monetary analysis showed broad money continuing to expand at a robust pace, with an annual rate of growth of 4.6% in January 2018   unchanged from the previous month   reflecting the impact of the ECB s monetary policy measures and the low opportunity cost of holding the most liquid deposits. Accordingly, the narrow monetary aggregate M1 continued to be the main contributor to broad money growth. At the same time, the recovery in loan growth to the private sector progressed. The pass-through of the monetary policy measures continued to ECB Economic Bulletin, Issue 2 / 2018   Economic and monetary developments Overview 3 support borrowing conditions for firms and households, access to financing   notably for small and medium-sized enterprises   and credit flows across the euro area. Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council confirmed the need for an ample degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%. The Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. Regarding non-standard monetary policy measures, the Governing Council confirmed that the net asset purchases are intended to run at the current monthly pace of  30 billion until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The Governing Council also reiterated that the Eurosystem will continue to reinvest the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. ECB Economic Bulletin, Issue 2 / 2018   Economic and monetary developments Overview 4 1 External environment The global economy expanded at an even faster rate in the second half of 2017. Global economic activity is expected to remain strong going forward, although the pace of growth will gradually moderate. The outlook for advanced economies is for robust expansion, reinforced by the significant fiscal stimulus in the United States. For emerging market economies, the outlook is supported by strengthening activity among commodity exporters. Global trade growth is seen to remain buoyant in the near term, while inflation is expected to rise slowly as spare capacity at the global level diminishes. Global economic activity and trade The pace of global economic expansion strengthened in the second half of 2017. Overall, data releases in this period surprised on the upside in both advanced economies and, to a lesser extent, emerging market economies (EMEs). Available GDP data across countries point to a sustained expansion of global economic activity in the final quarter of the year. Specifically, US real GDP growth proved resilient in the second half of 2017, shaking off the impact of the