European Central Bank — Economic Bulletin (Europe, 2020)

Economic Bulletin Issue 8 / 2020 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 The scarring effects of past crises on the global economy Liquidity conditions and monetary policy operations in the period from 22 July to 3 November 2020 Assessing short-term economic developments in times of COVID-19 Understanding the impact of the COVID-19 pandemic through an import-adjusted breakdown of euro area aggregate demand Developments in the tourism sector during the COVID-19 pandemic The long-term effects of the pandemic: insights from a survey of leading companies Assessing wage dynamics during the COVID-19 pandemic: can data on negotiated wages help? Draft budgetary plans for 2021: a review in times of the COVID-19 crisis Articles 1 2 3 The European exchange rate mechanism (ERM II) as a preparatory phase on the path towards euro adoption   the cases of Bulgaria and Croatia The impact of the COVID-19 pandemic on the euro area labour market The digital economy and the euro area Statistics ECB Economic Bulletin, Issue 8 / 2020   Contents 2 2 8 16 23 29 34 42 46 46 53 59 64 68 72 76 80 84 84 105 128 S1 1 Economic and monetary developments Overview At its monetary policy meeting on 10 December 2020, the Governing Council decided to recalibrate its monetary policy instruments. While the rebound in economic activity in the third quarter was stronger than expected and the prospects for the roll-out of vaccines are encouraging, the coronavirus (COVID-19) pandemic continues to pose serious risks to public health and to the euro area and global economies. The resurgence in COVID-19 cases and the associated containment measures are significantly restricting euro area economic activity, which is expected to have contracted in the fourth quarter of 2020. While activity in the manufacturing sector continues to hold up well, services activity is being severely curbed by the increase in infection rates and the new restrictions on social interaction and mobility. Inflation remains very low in the context of weak demand and significant slack in labour and product markets. Overall, the incoming data and the December 2020 Eurosystem staff macroeconomic projections suggest a more pronounced near-term impact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged. Against this background, the Governing Council decided to recalibrate its monetary policy instruments at its meeting on 10 December 2020. Economic and monetary assessment at the time of the Governing Council meeting of 10 December 2020 The global economy rebounded strongly in the third quarter of 2020 and this was followed by continued growth momentum at the start of the fourth quarter, but headwinds cloud the near-term economic outlook. While recent news about the development of effective vaccines against the coronavirus has sparked financial market optimism, the short-term global economic outlook remains clouded by the pandemic. The significant rise in the number of new COVID-19 infections, particularly in advanced economies, has led to the reintroduction of containment measures, although these measures are seen as less disruptive to economic activity than those implemented during the first wave of the pandemic. According to the December 2020 Eurosystem staff macroeconomic projections, global real GDP (excluding the euro area) will contract by 3.0% this year and expand by 5.8% in 2021, before growing by 3.9% and 3.6% in 2022 and 2023 respectively. Global trade (excluding the euro area) contracted more sharply than real GDP in 2020, but is expected to rebound more strongly in 2021. This primarily reflects the more pronounced procyclicality of trade, especially during economic downturns. These adverse effects are expected to be less severe in the context of the recent resurgence in infections. The balance of risks around the global economic outlook is seen as less negative than previously expected, as, given the news about the viability of several vaccines, it is less likely that the severe scenario will materialise. ECB Economic Bulletin, Issue 8 / 2020   Economic and monetary developments Overview 2 Overall, financial conditions in the euro area have loosened somewhat further since the Governing Council s meeting in September 2020, amid improved risk sentiment on the back of positive announcements about vaccines. Over the review period (10 September to 9 December 2020) the forward curve of the euro overnight index average (EONIA) fluctuated somewhat, but ultimately remained broadly unchanged. This reflects concerns about the accelerated spread of COVID-19 in Europe set against positive news about vaccines. The curve continues to be inverted only slightly at the short end. Long-term sovereign bond yields and spreads dropped significantly in the euro area over this period, amid expectations of continued monetary and fiscal support together with a global improvement in risk sentiment, triggered in particular by the news of successful vaccine trials. The prices of risk assets increased accordingly. In foreign exchange markets, the euro depreciated slightly in trade-weighted terms. Following a sharp contraction in the first half of 2020, euro area real GDP rebounded strongly and rose by 12.5%, quarter on quarter, in the third quarter, although remaining well below pre-pandemic levels. The second wave of the pandemic and the associated intensification of containment measures observed since mid-October are expected to result in a renewed significant decline in activity in the fourth quarter, although to a much lesser extent than observed in the second quarter of this year. Economic developments continue to be uneven across sectors, with activity in the services sector being more adversely affected by the new restrictions on social interaction and mobility than activity in the industrial sector. Although fiscal policy measures are supporting households and firms, consumers remain cautious in the light of the pandemic and its ramifications for employment and earnings. Moreover, weaker corporate balance sheets and uncertainty about the economic outlook are weighing on business investment. Looking ahead, recent advances in the development of COVID-19 vaccines allow for greater confidence in the assumption of a gradual resolution of the health crisis. However, it will take time until widespread immunity is achieved, while further resurgences in infections, with challenges to public health and economic prospects, cannot be ruled out. Over the medium term, the recovery of the euro area economy should be supported by favourable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are lifted and uncertainty recedes. This assessment is broadly reflected in the baseline scenario of the December 2020 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP growth at -7.3% in 2020, 3.9% in 2021, 4.2% in 2022 and 2.1% in 2023. Compared with the September 2020 ECB staff macroeconomic projections, the outlook for economic activity has been revised downwards in the short term but is seen to broadly recover to the level projected in the September baseline scenario over the medium term. Overall, the risks surrounding the euro area growth outlook remain tilted to the downside, but have become less pronounced. While the news about the prospects for vaccine roll-outs is encouraging, downside risks remain related to the implications of the pandemic for economic and financial conditions. ECB Economic Bulletin, Issue 8 / 2020   Economic and monetary developments Overview 3 According to Eurostat s flash estimate, euro area annual inflation remained unchanged at -0.3% in November. On the basis of oil price dynamics and taking into account the temporary reduction in the German VAT rate, headline inflation is likely to remain negative until early 2021. Thereafter, it is expected to increase owing to the end of the temporary VAT reduction in Germany and upward base effects in energy price inflation. At the same time, underlying price pressures are expected to remain subdued owing to weak demand, notably in the tourism and travel-related sectors, as well as to low wage pressures and the historically high level of the effective exchange rate of the euro. Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term. Market-based indicators and survey-based measures of longer-term inflation expectations remain at low levels. This assessment is broadly reflected in the baseline scenario of the December 2020 Eurosystem staff macroeconomic projections for the euro area, which foresees annual inflation at 0.2% in 2020, 1.0% in 2021, 1.1% in 2022 and 1.4% in 2023. Compared with the September 2020 ECB staff macroeconomic projections, the outlook for inflation has been revised down for 2020 and 2022. Annual HICP inflation excluding energy and food is expected to be 0.7% in 2020, 0.8% in 2021 and 1.0% in 2022, before increasing to 1.2% in 2023. The coronavirus pandemic has continued to influence monetary dynamics in the euro area. Broad money (M3) growth remained broadly unchanged at 10.5% in October 2020. Strong money growth has been supported by the ongoing asset purchases by the Eurosystem, which have become the largest source of money creation. In the context of a still heightened preference for liquidity and a low opportunity cost of hold