European Central Bank — Economic Bulletin (Europe, 2024)

Economic Bulletin Issue 4 / 2024 Contents Economic, financial and monetary developments Overview External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments Fiscal developments 1 2 3 4 5 6 Boxes 1 2 3 4 5 6 7 8 The post-pandemic recovery   why is the euro area growing more slowly than the United States? Insights from earnings calls   what can we learn from corporate risk perceptions and sentiment? Higher profit margins have helped firms hoard labour Drivers of employment growth in the euro area after the pandemic   a model-based perspective Will the euro area car sector recover? Profit indicators for inflation analysis considering the role of total costs Liquidity conditions and monetary policy operations from 31 January to 16 April 2024 Credit risk and bank lending conditions Articles 1 Sectoral dynamics and the business cycle in the euro area Box 1 Disentangling the business cycle implications of cross-sectoral shifts in activity between and within countries 2 Longer-term challenges for fiscal policy in the euro area Box 1 Methodology of the fiscal gap indicator ECB Economic Bulletin, Issue 4 / 2024   Contents 3 3 8 14 22 28 34 41 44 44 51 54 59 65 71 76 82 88 88 95 105 116 1 Statistics S1 ECB Economic Bulletin, Issue 4 / 2024   Contents 2 Economic, financial and monetary developments Overview At its meeting on 6 June 2024, the Governing Council decided to lower the three key ECB interest rates by 25 basis points. Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it was appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady. Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons. Monetary policy has kept financing conditions restrictive. By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down. At the same time, despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year. The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections. Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. For inflation excluding energy and food, staff project an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. Economic growth is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path. The Governing Council also confirmed that it will reduce the Eurosystem s holdings of securities under the pandemic emergency purchase programme (PEPP) by  7.5 billion per month on average over the second half of the year. The modalities for reducing the PEPP holdings will be broadly in line with those followed under the asset purchase programme (APP). ECB Economic Bulletin, Issue 4 / 2024   Economic, financial and monetary developments Overview 3 Economic activity After five quarters of stagnation, the euro area economy grew by 0.3% over the first quarter of 2024. The services sector is expanding, and manufacturing is showing signs of stabilisation at low levels. Employment rose by 0.3% in the first quarter of this year, with around 500,000 new jobs created, and surveys point to continued job growth in the near term. The unemployment rate edged down to 6.4% in April, its lowest level since the start of the euro. Companies are still posting many job vacancies, though slightly fewer than before. The euro area economy recovered at the start of 2024 by more than expected in the March 2024 ECB staff projections, with a boost from net trade and rising household spending. Incoming information suggests continued growth in the short run, at a higher pace than previously foreseen. Real disposable income should continue to increase amid robust wage growth, gradually increasing confidence and improving terms of trade, giving rise to a consumption-driven recovery in the course of 2024. The boost from net trade at the start of the year partly reflects volatility following a temporary decline at the end of 2023. However, foreign demand is expected to continue to expand, supporting euro area export growth. Over the medium term, the negative impact of the past monetary policy tightening is seen to gradually fade, with activity supported by an assumed easing of financing conditions in line with market expectations for the future path of interest rates. Growth will also benefit from a resilient labour market, with the unemployment rate declining to historically low levels later on in the projection horizon. As some of the cyclical factors that have lowered productivity growth in the recent past unwind, productivity is expected to pick up over the projection horizon. Overall, annual average real GDP growth is expected to be 0.9% in 2024, and to strengthen to 1.4% in 2025 and 1.6% in 2026. Compared with the March 2024 projections, the outlook for GDP growth has been revised up for 2024 owing to the positive surprise at the start of the year and improved incoming information. The GDP growth outlook has been revised down marginally for 2025 and remains unchanged for 2026. National fiscal and structural policies should be aimed at making the economy more productive and competitive, which would help to raise potential growth and reduce price pressures in the medium term. An effective, speedy and full implementation of the Next Generation EU programme, progress towards a capital markets union and the completion of the banking union, and a strengthening of the Single Market would help foster innovation and increase investment in the green and digital transitions. Implementing the EU s revised economic governance framework fully and without delay will help governments bring down budget deficits and debt ratios on a sustained basis. ECB Economic Bulletin, Issue 4 / 2024   Economic, financial and monetary developments Overview 4 Inflation Annual inflation rose to 2.6% in May, from 2.4% in April, according to Eurostat s flash estimate. Food price inflation declined to 2.6%. Energy price inflation increased to 0.3%, after recording negative annual rates for a year. Goods price inflation continued to decrease in May, to 0.8%. By contrast, services price inflation rose markedly, to 4.1% from 3.7% in April. Most measures of underlying inflation declined further in April, the last month for which data were available, confirming the picture of gradually diminishing price pressures. However, domestic inflation remains high. Wages are still rising at an elevated pace, making up for the past inflation surge. Owing to the staggered nature of the wage adjustment process and the important role of one-off payments, labour costs will likely fluctuate over the near term, as seen in the pick-up in negotiated wages in the first quarter. At the same time, forward-looking indicators signal that wage growth will moderate over the course of the year. Profits are absorbing part of the pronounced rise in unit labour costs, which reduces its inflationary effects. Measures of longer-term inflation expectations have remained broadly stable, with most standing at around 2%. Headline inflation is projected to moderate further to levels close to target in the course of 2025. This reflects an easing of cost pressures, including from the labour side, and the lagged impact of past monetary policy tightening gradually feeding through to consumer prices. Headline inflation as measured by the Harmonised Index of Consumer Prices (HICP) is expected to show some volatility over the remainder of 2024 owing to base effects and higher energy commodity prices. Over the medium term, energy inflation should settle at low positive rates, given market expectations for the future paths of oil and gas prices and planned climate change- related fiscal measures. Recent quarters have seen food price inflation decline strongly, as pipeline pressures have eased with lower energy and food commodity prices. Looking ahead, food price inflation is expected to fluctuate around its current levels before moderating further from the end of 2025. HICP inflation excluding energy and food (HICPX) should remain above headline inflation for most of the projection horizon but is expected to continue its disinflationary path, although at a slow pace and mainly in 2025 and 2026. A central element in the June projections is the expected gradual easing of nominal wage growth from initially still elevated levels as upward impacts from inflation compensation pressures in a tight labour