European Central Bank — Economic Bulletin (Europe, 2016)

Economic Bulletin Issue 6 / 2016 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 Determinants of the slowdown in global trade: what is the new normal? Financing constraints in euro area regions Liquidity conditions and monetary policy operations in the period from 27 April to 26 July 2016 Global production patterns from a European perspective: insights from a survey of large euro area firms What accounts for the recent decoupling between the euro area GDP deflator and the HICP excluding energy and food? Factors behind developments in average hours worked per person employed since 2008 Article 1 The employment-GDP relationship since the crisis Statistics 2 2 5 10 13 18 22 27 30 30 34 38 43 46 49 53 53 S1 ECB Economic Bulletin, Issue 6 / 2016 1 Economic and monetary developments Overview At its monetary policy meeting on 8 September 2016, the Governing Council assessed the economic and monetary data which had become available since the July meeting and discussed the new ECB staff macroeconomic projections. The comprehensive policy measures that have been adopted continue to ensure supportive financing conditions and underpin the momentum of the euro area economic recovery. As a result, the Governing Council continues to expect real GDP to grow at a moderate but steady pace and euro area inflation to rise gradually over the coming months, in line with the path already implied in the June 2016 staff projections. Overall, while the available evidence so far suggests resilience of the euro area economy to the continuing global economic and political uncertainty, the baseline scenario remains subject to downside risks. Economic and monetary assessment at the time of the Governing Council meeting of 8 September 2016 Moderate global growth continued in the first half of 2016. Looking ahead, global growth is expected to recover gradually. Low interest rates, improving labour markets and growing confidence support the outlook for advanced economies, although the uncertainty generated by the referendum in the United Kingdom on EU membership will weigh on demand in that country. As regards emerging market economies, economic activity in China is expected to slow, while the outlook for large commodity exporters remains subdued, despite some tentative signs of stabilisation. Risks to the outlook for global economic activity remain on the downside. Between early June and early September euro area and global financial markets remained relatively calm, apart from the immediate period around the UK referendum. In the period leading up to the referendum on 23 June, global financial markets exhibited increasing volatility, which spiked on the day following the referendum. Since then, financial market volatility has receded and most asset classes have recovered their losses. At the same time, long-term euro area bond yields remained significantly below their pre-referendum levels, and bank equities continued to underperform the wider market index. The economic recovery in the euro area is continuing. Euro area real GDP increased by 0.3%, quarter on quarter, in the second quarter of 2016, after 0.5% in the first quarter. Growth was supported by net exports as well as a continued positive contribution from domestic demand. Incoming data point to ongoing growth in the third quarter of 2016, at around the same rate as in the second quarter. Looking ahead, the Governing Council expects the economic recovery to proceed at a moderate but steady pace. Domestic demand remains supported by ECB Economic Bulletin, Issue 6 / 2016   Economic and monetary developments Overview 2 the pass-through of the monetary policy measures to the real economy. Favourable financing conditions and improvements in the demand outlook and in corporate profitability continue to promote a recovery in investment. Sustained employment gains, which are also benefiting from past structural reforms and still relatively low oil prices provide additional support for households  real disposable income and thus for private consumption. In addition, the fiscal stance in the euro area is expected to be mildly expansionary in 2016 and to turn broadly neutral in 2017 and 2018. However, the economic recovery in the euro area is expected to be dampened by still subdued foreign demand   partly related to the uncertainties following the UK referendum outcome   the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms. The September 2016 ECB staff macroeconomic projections for the euro area expect annual real GDP to increase by 1.7% in 2016, by 1.6% in 2017 and by 1.6% in 2018. Compared with the June 2016 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised downwards slightly. In the Governing Council s assessment, the risks to the euro area growth outlook remain tilted to the downside and relate mainly to the external environment. According to Eurostat s flash estimate, euro area annual HICP inflation in August 2016 was 0.2%, unchanged from July. While annual energy inflation continued to rise, services and non-energy industrial goods inflation was slightly lower than in July. Looking ahead, on the basis of current oil futures prices, inflation rates are likely to remain low over the next few months before starting to pick up towards the end of 2016, in large part owing to base effects in the annual rate of change of energy prices. Supported by the ECB s monetary policy measures and the expected economic recovery, inflation rates should increase further in 2017 and 2018. The September 2016 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.2% in 2016, 1.2% in 2017 and 1.6% in 2018. In comparison with the June 2016 Eurosystem staff macroeconomic projections, the outlook for HICP inflation is broadly unchanged. The monetary policy measures in place since June 2014 are filtering through to borrowing conditions for firms and households and are thereby increasingly supporting credit flows across the euro area. Broad money continued to increase at a robust pace in July 2016 and loan growth continued to recover gradually. Domestic sources of money creation were again the main driver of broad money growth. Low interest rates and the effects of the ECB s non-standard monetary policy measures continue to support money and credit dynamics. Banks have been passing on their favourable funding conditions in the form of lower lending rates and have eased credit standards, thereby supporting the recovery of loan growth. The annual flow of total external financing to non-financial corporations is estimated to have increased in the second quarter of 2016. ECB Economic Bulletin, Issue 6 / 2016   Economic and monetary developments Overview 3 Monetary policy decisions The Governing Council decided to keep the key ECB interest rates unchanged and continued to expect these rates to remain at present or lower levels for an extended period of time, and well past the horizon of the Eurosystem s net asset purchases. Regarding non-standard monetary policy measures, the Governing Council confirmed that the monthly asset purchases of  80 billion are intended to run until the end of March 2017, 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 will remain alert and ready to act, if warranted, to achieve its price stability objective. In the light of prevailing uncertainties, the Governing Council will continue to monitor economic and financial market developments very closely. It will preserve the very substantial amount of monetary support that is embedded in the ECB staff macroeconomic projections and that is necessary to secure a return of inflation to levels below, but close to, 2% over the medium term. If warranted, the Governing Council will act by using all the instruments available within its mandate. Meanwhile, the Governing Council tasked the relevant committees to evaluate the options that ensure a smooth implementation of the Eurosystem s asset purchase programme. ECB Economic Bulletin, Issue 6 / 2016   Economic and monetary developments Overview 4 1 External environment The moderate global growth recorded towards the end of last year continued in the first half of 2016. Looking ahead, global growth is expected to recover gradually. Low interest rates, improving labour markets and resilient confidence support the outlook for advanced economies, although the uncertainty generated by the referendum in the United Kingdom on EU membership will weigh on demand in that country. As regards emerging market economies (EMEs), economic activity in China is expected to slow, while the outlook for large commodity exporters remains subdued, despite some tentative signs of stabilisation. Risks to the outlook for global economic activity remain on the downside. Global economic activity and trade Global economic growth remains moderate. Following a soft patch in the first quarter, GDP growth in the United States strengthened only modestly in the second quarter, reflecting a large drag from inventories and a further decline in investment, driven primarily by falling capital expenditure in the energy sector. Meanwhile, economic growth in the United Kingdom was more resilient in the second quarter. In contrast, the pace of expansion in Japan slowed, after leap year effects had boosted growth in the first quarter. In China, GDP g