European Central Bank — Economic Bulletin (Europe, 2018)

Economic Bulletin Issue 8 / 2018 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 Emerging market vulnerabilities   a comparison with previous crises Liquidity conditions and monetary policy operations in the period from 1 August to 30 October 2018 Understanding the slowdown in growth in 2018 Compositional changes behind the growth in euro area employment during the recovery Recent developments in the wage drift in the euro area An assessment of draft budgetary plans for 2019 Statistics 2 2 5 12 17 22 28 35 38 38 45 51 55 60 64 S1 ECB Economic Bulletin, Issue 8 / 2018   Contents 1 Economic and monetary developments Overview At its monetary policy meeting on 13 December, the Governing Council decided to end the net asset purchases in December 2018, while keeping the key ECB interest rates unchanged and enhancing the forward guidance on reinvestment. While incoming information has been weaker than expected, reflecting softer external demand but also some country and sector-specific factors, the underlying strength of domestic demand continues to underpin the euro area expansion and gradually rising inflation pressures. This supports the Governing Council s confidence that the sustained convergence of inflation to its aim will proceed and will be maintained even after the end of the net asset purchases. At the same time, uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent. Therefore, significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. The Governing Council s forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets, continues to provide the necessary degree of monetary accommodation for the sustained convergence of inflation to its aim. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards its inflation aim in a sustained manner. Economic and monetary assessment at the time of the Governing Council meeting of 13 December 2018 While global economic activity has remained resilient, it has become more uneven and signs of moderating momentum are emerging. The maturing global economic cycle, waning policy support across advanced economies and the impact of tariffs between the United States and China are weighing on global activity. Global trade growth has decelerated somewhat, and uncertainties about future trade relations have risen. At the same time, financial conditions remain accommodative in advanced economies, whereas they have tightened for some emerging markets. Looking ahead, global economic activity is expected to decelerate in 2019 and remain steady thereafter. Global inflationary pressures are expected to rise slowly as spare capacity diminishes. Long-term risk-free rates have declined in the context of heightened geopolitical uncertainty and a perceived deterioration in the macroeconomic outlook since the Governing Council s meeting in September 2018. Euro area sovereign bond spreads have been largely stable, with the exception of those for Italy, which have exhibited considerable volatility. Although corporate earnings expectations remain robust, some downward revisions, in addition to a repricing of risk, have led to ECB Economic Bulletin, Issue 8 / 2018   Economic and monetary developments Overview 2 lower equity and bond prices of euro area corporations. In foreign exchange markets, the euro has broadly weakened in trade-weighted terms. Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. The latest data and survey results have been weaker than expected, reflecting a diminishing contribution from external demand and some country and sector-specific factors. While some of these factors are likely to unwind, this may suggest some slower growth momentum ahead. At the same time, domestic demand, also backed by the Governing Council s accommodative monetary policy stance, continues to underpin the economic expansion in the euro area. The strength of the labour market, as reflected in ongoing employment gains and rising wages, still supports private consumption. Moreover, business investment is benefiting from domestic demand, favourable financing conditions and improving balance sheets. Residential investment remains robust. In addition, the expansion in global activity is still expected to continue, supporting euro area exports, although at a slower pace. This assessment is broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.9% in 2018, 1.7% in 2019, 1.7% in 2020 and 1.5% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised slightly down in 2018 and 2019. The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. However, the balance of risks is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility. According to Eurostat s flash estimate, euro area annual HICP inflation declined to 2.0% in November 2018, from 2.2% in October. On the basis of current futures prices for oil, headline inflation is likely to decrease over the coming months. Measures of underlying inflation remain generally muted, but domestic cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets, which is pushing up wage growth. Looking ahead, underlying inflation is expected to increase over the medium term, supported by the ECB s monetary policy measures, the ongoing economic expansion and rising wage growth. This assessment is also broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.8% in 2018, 1.6% in 2019, 1.7% in 2020 and 1.8% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised slightly up for 2018 and down for 2019. HICP inflation excluding energy and food is expected to rise from 1.0% in 2018 to 1.4% in 2019, 1.6% in 2020 and 1.8% in 2021. Broad money (M3) growth picked up in October 2018, amid an ongoing shift towards more self-sustained sources of money creation as the monthly net asset purchases under the asset purchase programme were reduced. Lending to the private sector continued to grow and remained the largest driver of broad money ECB Economic Bulletin, Issue 8 / 2018   Economic and monetary developments Overview 3 growth, albeit with some signs of slowing down, mainly for loans to non-financial corporations. At the same time, bank funding and lending conditions have remained very favourable. The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing   in particular for small and medium-sized enterprises   and credit flows across the euro area. The euro area general government budget deficit is projected to have declined significantly in 2018 but to increase somewhat next year. The fall in 2018 was mainly the result of favourable cyclical conditions and declining interest payments. The aggregate fiscal stance for the euro area is expected to be broadly neutral in 2018, to loosen in 2019 and 2020, and to turn neutral again in 2021. Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council made the following decisions. The Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Regarding non-standard monetary policy measures, the Governing Council decided that net purchases under the asset purchase programme (APP) will end in December 2018. At the same time, the Governing Council enhanced its forward guidance on reinvestment. Accordingly, the Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. ECB Economic Bulletin, Issue 8 / 2018   Economic and monetary developments Overview 4 1 External environment While global economic activity has remained resilient, it has become more uneven and signs of moderating momentum are emerging. The maturing global economic cycle, waning policy support across advanced economies and the impact of tariffs between the United States and China are weighing on global activity. At the same time, financial conditions remain accommodative in advanced economies, while they have remained tight for some emerging markets. Global trade growth has decelerated somewhat, and uncertainties a