European Central Bank — Economic Bulletin (Europe, 2024)

Economic Bulletin Issue 8 / 2024 Contents Economic, financial and monetary developments Overview External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments Fiscal developments 1 2 3 4 5 6 Boxes 1 2 3 4 5 6 7 What s behind the resilience of US equity prices   market structure, earnings expectations or equity risk premia? The effects of the Emissions Trading System on European investment in the short run What are the economic signals from uncertainty measures? What explains the high household saving rate in the euro area? Monetary policy pass-through to goods and services inflation: a granular perspective Liquidity conditions and monetary policy operations from 24 July to 22 October 2024 TLTRO III phase-out and bank lending conditions Articles 1 2 Energy shocks, corporate investment and potential implications for future EU competitiveness Explaining the resilience of the euro area labour market between 2022 and 2024 Box 1 Labour market developments in the euro area compared with other advanced economies 3 Four years into the Next Generation EU programme: an updated preliminary evaluation of its economic impact Statistics ECB Economic Bulletin, Issue 8 / 2024   Contents 2 2 8 13 20 27 33 40 44 44 50 55 59 64 69 75 80 80 90 94 110 S1 1 Economic, financial and monetary developments Overview At its meeting on 12 December 2024, the Governing Council decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate   the rate through which the Governing Council steers the monetary policy stance   was based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The disinflation process is well on track. According to the December 2024 Eurosystem staff macroeconomic projections for the euro area, headline inflation is expected to average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027 when the expanded EU Emissions Trading System becomes operational. For inflation excluding energy and food, staff project an average of 2.9% in 2024, 2.3% in 2025 and 1.9% in both 2026 and 2027. Most measures of underlying inflation suggest that inflation will settle at around the Governing Council s 2% medium-term target on a sustained basis. Domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. Financing conditions are easing, as the Governing Council s recent interest rate cuts gradually make new borrowing less expensive for firms and households. But they continue to be tight because monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit. In the December 2024 projections, staff now expect a slower economic recovery than in the September 2024 ECB staff macroeconomic projections for the euro area. Although growth picked up in the third quarter, survey indicators suggest it has slowed in the fourth quarter. Staff see the economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. The projected recovery rests mainly on rising real incomes   which should allow households to consume more   and firms increasing investment. Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand. The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path. ECB Economic Bulletin, Issue 8 / 2024   Economic, financial and monetary developments Overview 2 Economic activity The economy grew by 0.4% in the third quarter of 2024, exceeding expectations. Growth was driven mainly by an increase in consumption, partly reflecting one-off factors that boosted tourism over the summer, and by firms building up inventories. But the latest information suggests it is losing momentum. Surveys indicate that manufacturing is still contracting and growth in services is slowing. Firms are holding back their investment spending in the face of weak demand and a highly uncertain outlook. Exports are also weak, with some European industries finding it challenging to remain competitive. The labour market remains resilient. Employment grew by 0.2% in the third quarter of 2024, again by more than expected. The unemployment rate remained at its historical low of 6.3% in October. Meanwhile, demand for labour continues to weaken. The job vacancy rate declined to 2.5% in the third quarter, 0.8 percentage points below its peak, and surveys also point to fewer jobs being created in the fourth quarter. The euro area economy is set to continue its gradual recovery over the coming years, amid significant geopolitical and policy uncertainty. In particular, rising real wages and employment, in a context of robust labour markets, are expected to support a recovery in which consumption remains one of the main drivers. Domestic demand should also be bolstered by an easing of financing conditions, in line with market expectations of the future path of interest rates. Although surrounded by high uncertainty, fiscal policies are assumed to be on a consolidation path overall. Nevertheless, funds from the Next Generation EU programme should support growth until the expiry of the programme in 2027. Under the baseline assumption that the trade policies of Europe s key trading partners remain unchanged, foreign demand is expected to strengthen and support euro area exports. As a result, net trade is expected to make a broadly neutral contribution to GDP growth, despite existing competitiveness challenges. The unemployment rate is set to decline further to historically low levels. As some of the cyclical factors that have recently reduced productivity start to unwind, productivity is expected to pick up over the projection horizon, although structural challenges remain. Overall, according to the December 2024 projections, annual average real GDP growth is projected to be 0.7% in 2024, 1.1% in 2025 and 1.4% in 2026, before moderating to 1.3% in 2027. Compared with the September 2024 projections, the outlook for GDP growth has been revised down, mainly owing to revisions to data on investment in the first half of 2024, expectations of weaker export growth in 2025, and a small downward revision to the projected expansion of domestic demand in 2026. Fiscal and structural policies should make the economy more productive, competitive and resilient. It is crucial to swiftly follow up, with concrete and ambitious structural policies, on Mario Draghi s proposals for enhancing European competitiveness and Enrico Letta s proposals for empowering the Single Market. The Governing Council welcomes the European Commission s assessment of governments  medium-term plans for fiscal and structural policies, as part of the EU s revised economic governance framework. Governments should now focus on implementing their ECB Economic Bulletin, Issue 8 / 2024   Economic, financial and monetary developments Overview 3 commitments under this framework fully and without delay. This will help bring down budget deficits and debt ratios on a sustained basis, while prioritising growth- enhancing reforms and investment. Inflation Annual inflation increased to 2.3% in November according to Eurostat s flash estimate, from 2.0% in October. The increase was expected and primarily reflected an energy-related upward base effect. Food price inflation edged down to 2.8% and services inflation to 3.9%. Goods inflation went up to 0.7%. Domestic inflation, which closely tracks services inflation, again eased somewhat in October. But at 4.2%, it remains high. This reflects strong wage pressures and the fact that some services prices are still adjusting with a delay to the past inflation surge. That said, underlying inflation is overall developing in line with a sustained return of inflation to target. Most measures of longer-term inflation expectations stand at around 2%, and market-based indicators of medium to longer-term inflation compensation have decreased measurably since the Governing Council s meeting on 17 October 2024. The increase in compensation per employee moderated to 4.4% in the third quarter of 2024 from 4.7% in the second. Amid stable productivity, this contributed to slower growth in unit labour costs. Easing labour cost pressures and the continuing impact of the Governing Council s past monetary policy tightening on consumer prices should help inflation to settle sustainably at around the 2% medium-term target, as previous sharp falls in energy prices continue to drop out of the annual rates. In the December 2024 projections, headline HICP inflation is projected to rise in late 2024, before declining to hover around the ECB s inflation target of 2% from the second quarter of 2025. Base effects in the energy component are expected to be the main driver of the temporary increase in inflation at the start of the projection horizon. Based on assumptions of declining oil and gas prices, energy inflation is likely to remain negative until the second half of 2025 and to