European Central Bank — Economic Bulletin (Europe, 2020)

Economic Bulletin Issue 1 / 2020 Contents Update on economic and monetary developments Summary 1 2 3 4 5 External environment Financial developments Economic activity Prices and costs Money and credit Boxes 1 2 3 4 5 6 Tracking global economic uncertainty: implications for global investment and trade US yield curve inversion and financial market signals of recession Breaking the  chain effect  of tariffs   foreign trade zones in the time of protectionism Integration of non-euro area central and eastern European EU countries in global value chains, export dynamics, and business cycle synchronisation with the euro area Bond market liquidity and swap market efficiency   what role does the repo market play? Business outlook surveys as indicators of euro area real business investment Articles 1 2 Statistics Household wealth and consumption in the euro area Assessing bank lending to corporates in the euro area since 2014 2 2 5 8 10 14 17 20 20 25 29 33 38 43 46 46 62 S1 ECB Economic Bulletin, Issue 1 / 2020   Contents 1 Update on economic and monetary developments Summary Incoming information since the last Governing Council meeting in early December is in line with the Governing Council s baseline scenario of ongoing, but moderate, growth of the euro area economy. In particular, the weakness in the manufacturing sector remains a drag on euro area growth momentum. At the same time, ongoing, albeit decelerating, employment growth and increasing wages continue to support the resilience of the euro area economy. The risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become less pronounced as some of the uncertainty surrounding international trade is receding. While inflation developments remain subdued overall, there are some signs of a moderate increase in underlying inflation in line with expectations. Against this background, the Governing Council kept its monetary policy stance unchanged at its meeting on 23 January 2020. The unfolding monetary policy measures are underpinning favourable financing conditions for all sectors of the economy. In particular, easier borrowing conditions for firms and households are supporting consumer spending and business investment. This will sustain the euro area expansion, the build-up of domestic price pressures and, thus, the robust convergence of inflation to the Governing Council s medium-term aim. Global economic activity remains moderate, but there are signs of stabilisation. In particular, the global manufacturing sector firmed in the last quarter of 2019, while the services sector remained broadly stable. Global trade remains weak amid signs of stabilisation. A preliminary trade deal between China and the United States has led to an easing of trade tensions, which should contribute to removing impediments to trade growth. Looking ahead, global inflationary pressures are expected to remain contained, while the balance of risks to global economic activity, although less pronounced, remains tilted to the downside. Since the Governing Council meeting in December 2019, movements in euro area financial markets have been limited, with asset prices continuing to be supported by accommodative monetary policy and improved risk sentiment as trade tensions have further receded. Long-term risk-free rates are broadly unchanged and the EONIA forward curve has shifted slightly upwards, continuing to signal market expectations of an unchanged deposit facility rate in the coming months. Sovereign spreads have remained broadly stable over this period. Equity prices have increased amid lower risk premia, and corporate bond spreads have decreased slightly. In foreign exchange markets, the euro has weakened slightly in trade-weighted terms. Euro area real GDP increased by 0.3%, quarter on quarter, in the third quarter of 2019, following growth of 0.2% in the second quarter. This pattern of moderate growth ECB Economic Bulletin, Issue 1 / 2020   Update on economic and monetary developments Summary 2 reflects the ongoing weakness of international trade in an environment of continued global uncertainties, which has particularly affected the euro area manufacturing sector and has also dampened investment growth. At the same time, the services and construction sectors remain more resilient, despite some moderation in the latter half of 2019. Incoming economic data and survey information point to some stabilisation in euro area growth dynamics, with near-term growth expected to be similar to rates observed in previous quarters. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains in conjunction with rising wages, the mildly expansionary euro area fiscal stance and the ongoing   albeit somewhat slower   growth in global activity. Euro area annual HICP inflation increased to 1.3% in December 2019, from 1.0% in November, reflecting mainly higher energy price inflation. On the basis of current futures prices for oil, headline inflation is likely to hover around current levels in the coming months. While indicators of inflation expectations remain at low levels, recently they have either stabilised or ticked up slightly. Measures of underlying inflation have remained generally muted, although there are further indications of a moderate increase in line with previous expectations. While labour cost pressures have strengthened amid tighter labour markets, the weaker growth momentum is delaying their pass-through to inflation. Over the medium term, inflation is expected to increase, supported by the ECB s monetary policy measures, the ongoing economic expansion and solid wage growth. Regarding monetary developments, broad money (M3) growth stood at 5.6% in November 2019, broadly unchanged since August. M3 growth continues to be backed up by bank credit creation and the narrow monetary aggregate M1 remained the main contributor to broad money growth. The growth of loans to firms and households remained solid, benefiting from the ongoing support provided by the ECB s accommodative monetary policy stance, which is reflected in very low bank lending rates. While the annual growth rate of loans to households remained unchanged from October, at 3.5% in November, the annual growth rate of loans to non-financial corporations moderated to 3.4%, from 3.8% in October, likely reflecting some lagged reaction to the past weakening in the economy. However, credit standards for both loans to firms and loans to households for house purchase remained broadly unchanged, pointing to still favourable credit supply conditions. The Governing Council s accommodative monetary policy stance will help to safeguard favourable bank lending conditions and will continue to support access to financing across all economic sectors and in particular for small and medium-sized enterprises. Combining the outcome of the economic analysis with the signals coming from the monetary analysis, the Governing Council confirmed that an ample degree of monetary accommodation is still necessary for the continued robust convergence of inflation to levels that are below, but close to, 2% over the medium term. On the basis of this assessment, the Governing Council decided to keep the key ECB interest rates unchanged and expects them to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. ECB Economic Bulletin, Issue 1 / 2020   Update on economic and monetary developments Summary 3 The Governing Council confirmed that it will continue to make net purchases under the ECB s asset purchase programme (APP) at a monthly pace of  20 billion. It expects them to run for as long as necessary to reinforce the accommodative impact of the ECB policy rates, and to end shortly before the Governing Council starts raising the key ECB interest rates. The Governing Council also 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 it 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. In the light of the continued subdued inflation outlook, the Governing Council reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time to support underlying inflation pressures and headline inflation developments over the medium term. The Governing Council s forward guidance will ensure that financial conditions adjust in accordance with changes to the inflation outlook. In any case, the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry. The Governing Council also decided to launch a review of the ECB s monetary policy strategy. The review will encompass the quantitative formulation of price stability, the monetary policy toolkit, the economic and monetary analyses and communication practices. Other considerations, such as financial stability, employment and environmental sustainability, will also be part of the review, which is expected to be concluded by the end of 2020. The review will be based on thorough analysis and open minds. Accordingly, the Eurosystem will engage with all stakeholders. ECB Econ