European Central Bank — Economic Bulletin (Europe, 2022)

Economic Bulletin Issue 3 / 2022 Contents Update on economic, financial and monetary developments Summary 1 2 3 4 5 External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments Boxes 1 2 3 4 5 6 7 Implications of the terms-of-trade deterioration for real income and the current account Main findings from the ECB s recent contacts with non-financial companies The recent drivers of household savings across the wealth distribution Minimum wages and their role for euro area wage growth What explains recent errors in the inflation projections of Eurosystem and ECB staff? The role of speculation during the recent increase in EU emissions allowance prices Gradual phasing-out of pandemic collateral easing measures Articles 1 2 Energy prices and private consumption: what are the channels? Economic inequality and public trust in the European Central Bank Statistics 2 2 7 12 17 22 25 32 32 36 39 44 49 58 64 69 69 85 S1 ECB Economic Bulletin, Issue 3 / 2022   Contents 1 Update on economic, financial and monetary developments Summary Russia s aggression in Ukraine is causing enormous suffering. It is also affecting the economy, in Europe and beyond. The conflict and the associated uncertainty are weighing heavily on the confidence of businesses and consumers. Trade disruptions are leading to new shortages of materials and inputs. Surging energy and commodity prices are reducing demand and holding back production. How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures. At the same time, economic activity is still being supported by the reopening of the economy after the crisis phase of the pandemic. Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. Inflation pressures have intensified across many sectors. At its meeting on 14 April 2022, the Governing Council judged that the incoming data since the meeting in March had reinforced its expectation that net asset purchases under the asset purchase programme (APP) should be concluded in the third quarter. Looking ahead, the ECB s monetary policy will depend on the incoming data and the evolving assessment of the outlook. In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy. It will take whatever action is needed to fulfil the ECB s mandate to pursue price stability and to contribute to safeguarding financial stability. Economic activity Global economic activity remained resilient at the start of 2022, with survey data indicating that the Omicron variant of the coronavirus (COVID-19) may only have a short-lived impact on advanced economies. However, the Russia-Ukraine war and new pandemic-related measures in Asia are expected to weigh on the global economy and are leading to fresh shortages of materials and inputs. The geopolitical situation and the pandemic are also acting as a drag on trade. At the same time, the delayed easing of supply chain disruptions and the economic impact of the war are likely to intensify global inflationary pressures. The impact on inflation is expected to be more significant in emerging market economies (EMEs) than in advanced economies, given the higher weight of commodities in the consumption baskets of EMEs. The euro area economy grew by 0.3% in the final quarter of 2021. It is estimated that growth remained weak during the first quarter of 2022, largely owing to pandemic- related restrictions. ECB Economic Bulletin, Issue 3 / 2022   Update on economic, financial and monetary developments Summary 2 Several factors point to slow growth also in the period ahead. The war is already weighing on the confidence of businesses and consumers, including through the uncertainty it brings. With energy and commodity prices rising sharply, households are facing a higher cost of living and firms are confronted with higher production costs. The war has created new bottlenecks, while a new set of pandemic measures in Asia is contributing to supply chain difficulties. Some sectors face growing difficulties in sourcing their inputs, which is disrupting production. However, there are also offsetting factors underpinning the ongoing recovery, such as compensatory fiscal measures and the possibility for households to draw on savings they accumulated during the pandemic. Moreover, the reopening of those sectors most affected by the pandemic and a strong labour market with more people in jobs will continue to support incomes and spending. Fiscal and monetary policy support remains critical, especially in this difficult geopolitical situation. In addition, the successful implementation of the investment and reform plans under the Next Generation EU programme will accelerate the energy and green transitions. This should help enhance long-term growth and resilience in the euro area. Inflation Inflation increased to 7.5% in March, from 5.9% in February. Energy prices were driven higher after the outbreak of the war and now stand 45% above their level one year ago. They continue to be the main reason for the high rate of inflation. Market- based indicators suggest that energy prices will stay high in the near term but will then moderate to some extent. Food prices have also increased sharply. This is due to elevated transportation and production costs, notably the higher price of fertilisers, which are in part related to the war in Ukraine. Price rises have become more widespread. Energy costs are pushing up prices across many sectors. Supply bottlenecks and the normalisation of demand as the economy reopens also continue to put upward pressure on prices. Measures of underlying inflation have risen to levels above 2% in recent months. It is uncertain how persistent the rise in these indicators will be, given the role of temporary pandemic-related factors and the indirect effects of higher energy prices. The labour market continues to improve, with unemployment having fallen to a historical low of 6.8% in February. Job postings across many sectors still signal robust demand for labour, yet wage growth remains muted overall. Over time the return of the economy to full capacity should support faster growth in wages. While various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%, initial signs of above- target revisions in those measures warrant close monitoring. ECB Economic Bulletin, Issue 3 / 2022   Update on economic, financial and monetary developments Summary 3 Risk assessment The downside risks to the growth outlook have increased substantially as a result of the war in Ukraine. While risks relating to the pandemic have declined, the war may have an even stronger effect on economic sentiment and could further worsen supply-side constraints. Persistently high energy costs, together with a loss of confidence, could drag down demand and restrain consumption and investment more than expected. The upside risks surrounding the inflation outlook have also intensified, especially in the near term. The risks to the medium-term inflation outlook include above-target moves in inflation expectations, higher than anticipated wage rises and a durable worsening of supply-side conditions. However, if demand were to weaken over the medium term, it would lower pressure on prices. Financial and monetary conditions Financial markets have been highly volatile since the war began and financial sanctions were imposed. Market interest rates have increased in response to the changing outlook for monetary policy, the macroeconomic environment and inflation dynamics. Bank funding costs have continued to increase. At the same time, so far there have been no severe strains in money markets, nor liquidity shortages in the euro area banking system. Although remaining at low levels, bank lending rates for firms and households have started to reflect the increase in market interest rates. Lending to households is holding up, especially for house purchases. Lending flows to firms have stabilised. The most recent euro area bank lending survey reports that credit standards for loans to firms and for housing loans tightened overall in the first quarter of the year, as lenders are becoming more concerned about the risks facing their customers in an uncertain environment. Credit standards are expected to tighten further in the coming months, as banks factor in the adverse economic impact of Russia s aggression towards Ukraine and higher energy prices. Conclusion Summing up, the war in Ukraine is severely affecting the euro area economy and has significantly increased uncertainty. The impact of the war on the economy will depend on how the conflict evolves, on the effect of current sanctions and on possible further measures. Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. The Governing Council is very attentive to the current uncertainties and is closely monitoring the incoming data in relation to their implications for the medium-term inflation outlook. The calibration of the ECB s policies will remain data-dependent and reflect the Governing Council s evolving assessment of the outlook. The ECB Economic Bulletin, Issue 3 / 2022   Update on economic, financial and monetary developments Summary 4 Governing Council stands ready to adjust all of its instruments within its mandate, incorporating flexibility if warranted, to ensure