European Central Bank — Economic Bulletin (Europe, 2022)

Economic Bulletin Issue 2 / 2022 Contents Economic, financial 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 Supply chain bottlenecks in the euro area and the United States: where do we stand? The role of credit risk in recent global corporate bond valuations Liquidity conditions and monetary policy operations from 3 November 2021 to 8 February 2022 Corporate saving ratios during the pandemic The role of the inventory cycle in the current recovery The labour market recovery in the euro area through the lens of the ECB Consumer Expectations Survey Which sub-components are driving owner-occupied housing costs? Articles 1 2 Financial risks in China s corporate sector: real estate and beyond Assessing corporate vulnerabilities in the euro area Statistics 2 2 9 19 25 32 39 47 51 51 55 62 68 74 79 84 88 88 105 S1 ECB Economic Bulletin, Issue 2 / 2022   Contents 1 Economic, financial and monetary developments Overview The Russian invasion of Ukraine will have a material impact on economic activity and inflation through higher energy and commodity prices, the disruption of international commerce and weaker confidence. The extent of these effects will depend on how the conflict evolves, on the impact of current sanctions and on possible further measures. The impact of the war has to be assessed in the context of solid underlying conditions for the euro area economy, helped by ample policy support. The recovery of the economy is being boosted by the fading impact of the Omicron variant of the coronavirus (COVID-19). Supply bottlenecks have been showing some signs of easing and the labour market has been improving further. In the baseline of the March 2022 ECB staff macroeconomic projections, which incorporate a first assessment of the implications of the war in Ukraine, GDP growth has been revised downwards for the near term owing to the conflict. Inflation has continued to surprise on the upside because of unexpectedly high energy costs. Price rises have also become more broadly based. The baseline for inflation in the new staff projections has been revised upwards significantly. Longer-term inflation expectations across a range of measures have re-anchored at the ECB s inflation target. The Governing Council sees it as increasingly likely that inflation will stabilise at its 2% target over the medium term. In alternative scenarios for the economic and financial impact of the war, economic activity could be dampened significantly by a steeper rise in energy and commodity prices and a more severe drag on trade and sentiment. Inflation could be considerably higher in the near term. However, in all scenarios, inflation is still expected to decrease progressively and settle at levels around the 2% inflation target in 2024. Based on its updated assessment of the inflation outlook and taking into account the uncertain environment, the Governing Council has revised the purchase schedule for its asset purchase programme (APP) for the coming months. Monthly net purchases under the APP will amount to  40 billion in April,  30 billion in May and  20 billion in June. The calibration of net purchases for the third quarter will be data-dependent and will reflect the Governing Council s evolving assessment of the outlook. If the incoming data support the expectation that the medium-term inflation outlook will not weaken, even after the end of its net asset purchases, the Governing Council will conclude net purchases under the APP in the third quarter. If the medium-term inflation outlook changes and financing conditions become inconsistent with further progress towards the 2% target, the Governing Council stands ready to revise its schedule for net asset purchases in terms of size and/or duration. Any adjustments ECB Economic Bulletin, Issue 2 / 2022   Economic, financial and monetary developments Overview 2 to the key ECB interest rates will take place some time after the end of net purchases under the APP and will be gradual. The path for the key ECB interest rates will continue to be determined by the Governing Council s forward guidance and by its strategic commitment to stabilising inflation at 2% over the medium term. Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. The Governing Council also confirmed its other policy measures. Economic activity The global economy expanded at a robust pace during 2021, despite headwinds related to the resurgence of the coronavirus pandemic and supply bottlenecks. Survey indicators point to continued growth in activity in the first quarter of 2022. However, the Russia-Ukraine war casts significant uncertainty on an otherwise robust global outlook. Recent surveys of economic activity suggest that growth momentum picked up from January to February as pandemic and supply-side pressures eased. However, on account of the economic fallout from the war and the gradual unwinding of policy stimulus, projections of global growth have been revised downwards, in particular for 2022 and 2023, when compared with the December projections. Global real GDP (excluding the euro area) is estimated to have expanded by 6.3% in 2021, with the pace of growth projected to moderate to 4.1% in 2022 and 3.6% in both 2023 and 2024. Euro area foreign demand growth is projected to moderate from 9.9% in 2021 to 4% in 2022, 3.2% in 2023 and 3.6% in 2024. Compared with global imports, euro area foreign demand is more heavily affected by the conflict, given the relatively large share of euro area trade which stems from Russia and countries in central and eastern Europe that are particularly exposed to the headwinds from the conflict. Compared with the previous projections, the growth rate of euro area foreign demand has been left unchanged for 2022 (as the impact of the invasion fully offsets the positive carry-over effect from 2021) and has been revised downwards for 2023 and 2024. Supply bottlenecks are expected to start easing during 2022 and to fully unwind by 2023. The export prices of the euro area s competitors have been revised upwards for 2022 and 2023 as higher commodity prices, supply bottlenecks and recovering demand overlap. While the future course of the pandemic remains an important risk factor affecting the baseline projections for the global economy, the Russia-Ukraine war significantly amplifies uncertainty. Downside tail risks from a further escalation could be significant and could derail the global recovery, while fuelling inflationary pressures. The Russia-Ukraine war will have a material impact on economic activity in the euro area through higher energy and commodity prices, the disruption of international commerce and weaker confidence. However, underlying conditions are solid, helped by ample policy support. The economy grew by 5.3% in 2021, with GDP returning to its pre-pandemic level at the end of the year. However, growth slowed to 0.3% in the last quarter of 2021 and is expected to remain weak during the first quarter of 2022. ECB Economic Bulletin, Issue 2 / 2022   Economic, financial and monetary developments Overview 3 The prospects for the economy will depend on the course of the Russia-Ukraine war and on the impact of economic and financial sanctions and other measures. At the same time, other headwinds to growth are now waning. In the baseline of the staff projections, the euro area economy should still grow robustly in 2022, but the pace will be slower than was expected before the outbreak of the war. Measures to contain the spread of the Omicron variant have had a milder impact than those employed during previous waves and are now being lifted. The supply disruptions caused by the pandemic also show some signs of easing and the labour market has continued to strengthen. The impact of the massive energy price shock on people and businesses may be partly cushioned by drawing on savings accumulated during the pandemic and by compensatory fiscal measures. According to the March 2022 ECB staff macroeconomic projections, the euro area general government budget balance remains on a path to improvement following the very high deficits recorded as a result of the coronavirus crisis. Risks to this baseline are, however, substantial and increasingly tilted towards larger budget deficits, mainly related to the war in Ukraine. According to the baseline, the deficit ratio is estimated to have fallen to 5.5% of GDP in 2021 from a peak of 7.2% in 2020. It is projected to fall further to 3.1% in 2022 and to 2% by the end of the forecast horizon. In terms of the euro area fiscal stance, a strong expansion in 2020 was followed by a moderate tightening in 2021 once adjusted for Next Generation EU (NGEU) grants. In 2022 the stance is projected to tighten further, mainly owing to a reversal of a significant part of the coronavirus crisis emergency support. The tightening is projected to be only marginal over the last two years of the forecast horizon, and significant support to the economy remains in place. In the light of high risks currently emanating from multiple sources, which are in part already materialising, fiscal measures, including at EU level, would help to shield the economy. Fiscal policies need to remain agile as the situation evolves. A willingness to employ fiscal