European Central Bank — Economic Bulletin (Europe, 2021)

Economic Bulletin Issue 8 / 2021 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 8 Supply chain disruptions and the effects on the global economy The US and UK labour markets in the post-pandemic recovery Financing conditions through the lens of euro area companies Decomposing market-based measures of inflation compensation into inflation expectations and risk premia Liquidity conditions and monetary policy operations from 28 July to 2 November 2021 The ECB s communication on the economic outlook: a comparative analysis Sources of supply chain disruptions and their impact on euro area manufacturing Fiscal policies in 2022   implications of the 2022 draft budgetary plans Articles 1 2 The ECB Survey of Monetary Analysts: an introduction ECB communication with the wider public Statistics 2 2 7 16 22 30 38 47 51 51 58 63 71 76 82 87 92 97 97 122 S1 ECB Economic Bulletin, Issue 8 / 2021   Contents 1 Economic, financial and monetary developments Overview Economic activity The global economy remains on a recovery path, although persisting supply bottlenecks, rising commodity prices and the emergence of the Omicron variant of the coronavirus (COVID-19) continue to weigh on the near-term growth prospects. Recent surveys of economic activity suggest that growth momentum remained weak at the start of the fourth quarter, particularly in the manufacturing sector owing to the above-mentioned supply bottlenecks, whereas the services sector benefited from the reopening of large economies. Compared with the previous projections, the growth outlook for the global economy in the December 2021 Eurosystem staff macroeconomic projections has been revised downwards for 2021, remained unchanged for 2022 and been revised upwards for 2023. Global real GDP growth (excluding the euro area) is estimated to increase to 6.0% in 2021, before slowing to 4.5% in 2022, 3.9% in 2023 and 3.7% in 2024. Euro area foreign demand is projected to expand by 8.9% in 2021, 4.0% in 2022, 4.3% in 2023 and 3.9% in 2024. However, foreign demand has been revised downwards for 2021 and 2022 compared with the previous projections. This reflects the adverse impact of the ongoing supply bottlenecks on global imports. Supply bottlenecks are expected to start easing from the second quarter of 2022 and to fully unwind by 2023. The export prices of euro area competitors have been revised upwards for 2021 and 2022 amid the confluence of higher commodity prices, supply bottlenecks and recovering demand. The future course of the pandemic remains the key risk affecting the baseline projections for the global economy. Other risks to the growth outlook are judged to be tilted to the downside, whereas the balance of risks to global inflation is more uncertain. The euro area economy continues to recover. Growth is moderating, but activity is expected to pick up again strongly in the course of this year. The continued economic recovery is foreseen to be driven by robust domestic demand. The labour market is improving, with more people having jobs and fewer in job retention schemes. This supports the prospect of rising household income and consumption. The savings built up during the pandemic will also support consumption. Economic activity moderated over the final quarter of last year and this slower growth is likely to extend into the early part of this year. We now expect output to exceed its pre-pandemic level in the first quarter of 2022. To cope with the current pandemic wave, some euro area countries have reintroduced tighter containment measures. This could delay the recovery, especially in travel, tourism, hospitality and entertainment. The pandemic is weighing on consumer and business confidence and the spread of new virus variants is creating extra uncertainty. In ECB Economic Bulletin, Issue 8 / 2021   Economic, financial and monetary developments Overview 2 addition, rising energy costs are a headwind for consumption. Shortages of equipment, materials and labour in some sectors are hampering production of manufactured goods, causing delays in construction and slowing down the recovery in some parts of the services sector. These bottlenecks will persist for some time, but they should ease during 2022. Although the COVID-19 crisis continued to weigh heavily on public finances in 2021, the December Eurosystem staff macroeconomic projections show that the fiscal balance is already on a path to improvement. Having peaked at 7.2% of GDP in 2020, the deficit ratio is estimated to have fallen to 5.9% in 2021 and is projected to fall further to 3.2% in 2022 and to stabilise just below 2% by the end of the forecast horizon in 2024. These improvements are due to a combination of higher cyclically adjusted primary balances and, particularly from 2022, a significantly larger contribution from the economic cycle. In terms of the euro area fiscal stance, a strong expansion in 2020 was followed by only a marginal tightening in 2021 once adjusted for Next Generation EU (NGEU) grants. In 2022, the stance is projected to tighten considerably, albeit much less than forecast previously, mainly owing to a reversal of a significant part of crisis emergency support. The tightening is projected to continue over the remainder of the forecast horizon, but to a much smaller extent, as significant support to the economy will remain in place over the coming years. Targeted and growth-friendly fiscal measures should continue to complement monetary policy. This support will also help the economy adjust to the structural changes that are under way. An effective implementation of the NGEU programme and the  Fit for 55  package will contribute to a stronger, greener and more even recovery across euro area countries. Growth is expected to rebound strongly over the course of 2022. The December Eurosystem staff macroeconomic projections foresee annual real GDP growth at 5.1% in 2021, 4.2% in 2022, 2.9% in 2023 and 1.6% in 2024. Compared with the September staff projections, the outlook has been revised down for 2022 and up for 2023. Inflation Inflation increased further to 4.9% in November. It will remain above 2% for most of 2022. Inflation is expected to remain elevated in the near term, but to decline in the course of this year. The upswing in inflation primarily reflects a sharp rise in prices for fuel, gas and electricity. In November, energy inflation accounted for more than half of headline inflation. Demand also continues to outpace constrained supply in certain sectors. The consequences are especially visible in the prices of durable goods and those consumer services that have recently reopened. Base effects related to the reversal of the VAT cut in Germany are still contributing to higher inflation, but only until the end of 2021. There is uncertainty as to how long it will take for these issues to resolve. But, in the course of 2022, energy prices are expected to stabilise, consumption patterns to normalise, and price pressures stemming from global supply bottlenecks to subside. Over time, the gradual return of the economy to full capacity and further improvements in the labour market should support faster ECB Economic Bulletin, Issue 8 / 2021   Economic, financial and monetary developments Overview 3 growth in wages. Market and survey-based measures of longer-term inflation expectations have remained broadly stable since the October monetary policy meeting. But overall, these have moved closer to 2% in recent months. These factors will help underlying inflation to move up and bring headline inflation up to the ECB s 2% target over the medium term. The December 2021 Eurosystem staff macroeconomic projections foresee annual inflation at 2.6% in 2021, 3.2% in 2022, 1.8% in 2023 and 1.8% in 2024   significantly higher than in the previous projections in September. Inflation excluding food and energy is projected to average 1.4% in 2021, 1.9% in 2022, 1.7% in 2023 and 1.8% in 2024, also higher than in the September projections. Risk assessment The Governing Council sees the risks to the economic outlook as broadly balanced. Economic activity could outperform the ECB s expectations if consumers become more confident and save less than expected. By contrast, the recent worsening of the pandemic, including the spread of new variants, could be a more persistent drag on growth. The future path of energy prices and the pace at which supply bottlenecks are resolved are risks to the recovery and to the outlook for inflation. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher. Financial and monetary conditions Market interest rates have remained broadly stable since the October Governing Council meeting. Over the review period (9 September to 15 December 2021), euro area financial markets were predominantly influenced by shifts in the inflation outlook and renewed uncertainty about further COVID-19-related economic repercussions. The news of the new Omicron variant created volatility, but the strong initial negative impact, especially on risk assets, partly reversed towards the end of the review period. Money creation in the euro area edged up in October 2021, reflecting greater uncertainty related to the COVID-19 pandemic and policy support measures. Eurosystem asset purchases remained the dominant source of money creation. Bank lending rates for firms and households remained at historically low levels. Overall, financing conditions for the economy remai