European Central Bank — Economic Bulletin (Europe, 2021)

Economic Bulletin Issue 4 / 2021 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 Developments in the euro area current account during the pandemic The impact of fiscal support measures on the liquidity needs of firms during the pandemic Liquidity conditions and monetary policy operations in the period from 27 January to 27 April 2021 The impact of the COVID-19 crisis on the euro area labour market for men and women Euro area house price developments during the coronavirus pandemic The semiconductor shortage and its implication for euro area trade, production and prices Implications of the 2021 stability programmes for fiscal policies in the euro area Articles 1 Globalisation and its implications for inflation in advanced economies Statistics 2 2 8 16 21 27 34 43 47 47 54 60 66 74 78 83 88 88 S1 ECB Economic Bulletin, Issue 4 / 2021   Contents 1 Economic and monetary developments Overview After the contraction in the first quarter of the year, the euro area economy is gradually reopening as the coronavirus (COVID-19) pandemic situation improves and vaccination campaigns make significant progress. The latest data signal a bounce-back in services activity and ongoing dynamism in manufacturing production. Economic activity is expected to accelerate in the second half of this year as further containment measures are lifted. A pick-up in consumer spending, strong global demand and accommodative fiscal and monetary policies will lend crucial support to the recovery. At the same time, uncertainties remain, as the near-term economic outlook continues to depend on the course of the pandemic and on how the economy responds after reopening. Inflation has picked up over recent months, largely on account of base effects, transitory factors and an increase in energy prices. It is expected to rise further in the second half of the year, before declining as temporary factors fade out. The new staff projections point to a gradual increase in underlying inflation pressures throughout the projection horizon, although the pressures remain subdued in the context of still significant economic slack that will only be absorbed gradually over the projection horizon. Headline inflation is expected to remain below the Governing Council s aim over the projection horizon. Preserving favourable financing conditions over the pandemic period remains essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability. Financing conditions for firms and households have remained broadly stable since the Governing Council s monetary policy meeting in March. However, market interest rates have increased further. While partly reflecting improved economic prospects, a sustained rise in market rates could translate into a tightening of wider financing conditions that are relevant for the entire economy. Such a tightening would be premature and would pose a risk to the ongoing economic recovery and the outlook for inflation. Against this background and based on a joint assessment of financing conditions and the inflation outlook, the Governing Council decided to confirm its very accommodative monetary policy stance. Economic and monetary assessment at the time of the Governing Council meeting of 10 June 2021 The June 2021 Eurosystem staff macroeconomic projections suggest that global economic activity continued to recover at the turn of the year despite the intensification of the pandemic, with emerging market economies becoming the epicentre of new infections globally. While activity in the fourth quarter of 2020 turned out to be slightly stronger than expected in the previous projections, the global economy entered 2021 on a weaker footing amid a resurgence in new infections and tighter containment measures. Recent surveys signal strong momentum in global ECB Economic Bulletin, Issue 4 / 2021   Economic and monetary developments Overview 2 activity, although signs of divergence between advanced and emerging market economies, and between the manufacturing and services sectors, are becoming more apparent. The large fiscal stimulus approved by the Biden administration is projected to strengthen the recovery in the United States, with some positive global spillovers. Against this backdrop, the growth outlook for the global economy is little changed compared to the previous projections. Global real GDP growth (excluding the euro area) is projected to increase by 6.2% this year, before slowing to 4.2% and 3.7% in 2022 and 2023 respectively. However, euro area foreign demand was revised upwards compared with the previous projections. It is projected to increase by 8.6% this year and by 5.2% and 3.4% in 2022 and 2023 respectively. This mainly reflects stronger demand from the United States and the United Kingdom, the euro area s key trading partners. The export prices of euro area competitors were revised upwards for this year amid higher commodity prices and stronger demand. Risks to the global baseline projections relate mainly to the future course of the pandemic. Other risks to the global outlook for activity are judged to be broadly balanced, while the risks for global inflation are tilted to the upside. Financial conditions in the euro area have continued to tighten somewhat since the last Governing Council meeting, amid positive risk sentiment. Over the review period (11 March to 9 June 2021), euro area sovereign bond yields and their spreads over the overnight index swap (OIS) rate increased moderately, mainly amid an improved economic outlook in the light of progress in vaccination campaigns across the euro area together with continuing policy support. The forward curve of the euro overnight index average (EONIA) increased marginally across medium to long-term maturities, while the short end of the curve has remained largely the same, suggesting no expectations of an imminent policy rate change in the very near term. Equity prices also increased, supported by a combination of still relatively low discount rates and a strong recovery in corporate earnings growth expectations. Mirroring equity prices, euro area corporate bond spreads continued to tighten and stand at levels last observed prior to March 2020. In foreign exchange markets, the nominal effective exchange rate of the euro strengthened slightly. In the first quarter of the year, euro area real GDP declined further, by 0.3%, to stand 5.1% below its pre-pandemic level of the fourth quarter of 2019. Business and consumer surveys and high-frequency indicators point to a sizeable improvement in activity in the second quarter of this year. Business surveys indicate a strong recovery in services activity as infection numbers decline, which will allow a gradual normalisation of high-contact activities. Manufacturing production remains robust, supported by solid global demand, although supply-side bottlenecks could pose some headwinds for industrial activity in the near term. Indicators of consumer confidence are strengthening, suggesting a strong rebound in private consumption in the period ahead. Business investment shows resilience, despite weaker corporate balance sheets and the still uncertain economic outlook. Looking ahead, growth is expected to continue to improve strongly in the second half of 2021 as progress in vaccination campaigns allows a further relaxation of containment measures. Over the medium term, the recovery in the euro area economy is expected to be buoyed by stronger global and domestic demand, as well as by continued support from both monetary policy and fiscal policy. ECB Economic Bulletin, Issue 4 / 2021   Economic and monetary developments Overview 3 This assessment is broadly reflected in the baseline scenario of the June 2021 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP growth at 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023. Compared with the March 2021 ECB staff macroeconomic projections, the outlook for economic activity has been revised up for 2021 and 2022, while it is unchanged for 2023. Overall, the risks surrounding the euro area growth outlook are broadly balanced. On the one hand, an even stronger recovery could be predicated on brighter prospects for global demand and a faster-than-anticipated reduction in household savings once social and travel restrictions have been lifted. On the other hand, the ongoing pandemic, including the spread of virus mutations, and its implications for economic and financial conditions continue to be sources of downside risk. According to Eurostat s flash release, euro area annual inflation increased from 1.3% in March to 1.6% in April and 2.0% in May 2021. This rise was due mainly to a strong increase in energy price inflation, reflecting both sizeable upward base effects as well as month-on-month increases, and, to a lesser extent, a slight increase in non-energy industrial goods inflation. Headline inflation is likely to increase further towards the autumn, reflecting mainly the reversal of the temporary VAT reduction in Germany. Inflation is expected to decline again at the start of next year as temporary factors fade out and global energy prices moderate. Underlying price pressures are expected to increase somewhat this year owing to temporary supply constraints and the recovery in domestic demand. Nevertheless, the price pressures will likely remain subdued overall, in part reflecting low wage pressures, in the context of still significant economic slack, and the appreciation of the euro exch