European Central Bank — Economic Bulletin (Europe, 2020)

Economic Bulletin Issue 5 / 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 7 8 US dollar funding tensions and central bank swap lines during the COVID-19 crisis The great trade collapse of 2020 and the amplification role of global value chains The impact of the ECB s monetary policy measures taken in response to the COVID-19 crisis Euro area equity markets and shifting expectations for an economic recovery A preliminary assessment of the impact of the COVID-19 pandemic on the euro area labour market High-frequency data developments in the euro area labour market Recent developments in euro area food prices Drivers of firms  loan demand in the euro area   what has changed during the COVID-19 pandemic? Articles 1 2 3 Consumption of durable goods in the euro area Drivers of rising labour force participation   the role of pension reforms Liquidity distribution and settlement in TARGET2 Statistics ECB Economic Bulletin, Issue 5 / 2020   Contents 2 2 5 9 12 17 21 25 25 32 37 44 51 56 63 67 75 75 100 124 S1 1 Update on economic and monetary developments Summary Incoming information since the last monetary policy meeting in early June signals a resumption of euro area economic activity, although the level of activity remains well below the levels prevailing before the coronavirus (COVID-19) pandemic and the outlook remains highly uncertain. Headline inflation is being dampened by lower energy prices and price pressures are expected to remain very subdued on account of the sharp decline in real GDP growth and the associated significant increase in economic slack. The ECB s monetary policy measures are gradually making their way through to the euro area economy, providing crucial support to the recovery and helping to offset the pandemic-related downward shift in the projected path of inflation. At the same time, the outlook is surrounded by high uncertainty and subject to downside risks. Against this background, the Governing Council decided to leave the overall monetary policy stance unchanged and to reconfirm the full set of its existing monetary policy measures. While containment policies have been eased across the world, the global recovery remains uneven, uncertain and incomplete. Survey data suggest that the unprecedented contraction in the global economy in the first half of 2020 has been bottoming out, while cautious consumer behaviour points to sluggish growth momentum ahead. While the recovery is proceeding in China, the outlook remains highly uncertain in the United States, although there have been some positive data surprises. In the United Kingdom and Japan, indicators also point to a bottoming-out of the contraction in some sectors, but activity levels remain very weak. In this context, global inflation remains subdued. Over the review period, the forward curve of the euro overnight index average (EONIA) shifted slightly downwards and a mild inversion appeared at short maturities, albeit without expectations of an imminent cut in policy rates. Long-term euro area sovereign bond yields also declined on account of lower risk-free rates and sovereign spreads recorded a slight compression. Equities continued to recover from the troughs reached in March and, despite compressing further, corporate bond spreads are still wider than they were in late February. In foreign exchange markets, the euro strengthened slightly in trade-weighted terms. Incoming data and survey results suggest that economic activity improved significantly in May and June from its trough in April, alongside the ongoing containment of the virus and the associated easing of the lockdown measures. At the same time, economic indicators remain well below the levels recorded before the pandemic, and the recovery is in its early stages and remains uneven across sectors and jurisdictions. After decreasing by 3.6%, quarter on quarter, in the first quarter of 2020, euro area real GDP is expected to have contracted even further overall in the second quarter, broadly ECB Economic Bulletin, Issue 5 / 2020   Update on economic and monetary developments Summary 2 in line with the June 2020 Eurosystem staff macroeconomic projections. Signs of a recovery in consumption have emerged, while there has also been a significant rebound in industrial output. At the same time, subdued labour market conditions and precautionary household saving are weighing on consumer spending. Weak business prospects and high uncertainty are dampening investment, while the weakness in the global economy is hampering foreign demand for euro area goods and services. According to Eurostat s flash estimate, euro area annual HICP inflation increased from 0.1% in May to 0.3% in June, mainly reflecting less negative energy price inflation. On the basis of current and futures prices for oil and taking into account the temporary reduction in the German VAT rate, headline inflation is expected to decline again in the coming months before rebounding in early 2021. Over the medium term, weaker demand will put downward pressure on inflation, which will be only partially offset by upward pressures related to supply constraints. Market-based indicators of longer-term inflation expectations have remained at subdued levels. Since March 2020 the coronavirus pandemic has caused monetary dynamics to accelerate sharply, driven by businesses  acute liquidity needs to finance ongoing expenditures and economic agents  strong preference for money holdings on precautionary grounds. In May domestic credit remained the main source of money creation, which was driven in particular by loans to non-financial corporations and the Eurosystem s net purchases of government securities under the asset purchase programmes. The July 2020 euro area bank lending survey shows a continued upward impact of the pandemic on firms  loan demand, largely reflecting emergency liquidity needs. At the same time, credit standards for loans to firms have remained favourable, supported by fiscal and monetary measures. In addition, very favourable lending rates, which point to an ongoing robust transmission of monetary policy measures, are supporting euro area economic growth. Against this background, ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability. Therefore, the Governing Council decided to reconfirm its very accommodative monetary policy stance. The Governing Council will keep the key ECB interest rates unchanged. They are expected to remain at their present or lower levels until the inflation outlook has robustly converged to a level sufficiently close to, but below, 2% within the projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of  1,350 billion. These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the pandemic-related downward shift in the projected path of inflation. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy. The Governing Council will conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, until it judges that the coronavirus crisis phase is over. The Governing Council will ECB Economic Bulletin, Issue 5 / 2020   Update on economic and monetary developments Summary 3 reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2022. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance. Net purchases under the asset purchase programme (APP) will continue at a monthly pace of  20 billion, together with the purchases under the additional  120 billion temporary envelope until the end of the year. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of the policy rates, and to end shortly before it starts raising the key ECB interest rates. 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 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. The Governing Council will also continue to provide ample liquidity through its refinancing operations. In particular, the latest operation in the third series of targeted longer-term refinancing operations (TLTRO III) has registered a very high take-up of funds, supporting bank lending to firms and households. The monetary policy measures that the Governing Council has taken since early March are providing crucial support to underpin the recovery of the euro area economy and to safeguard medium-term price stability. In particular, they support liquidity and funding conditions in the economy, help to sustain the flow of credit to households and firms, and contribute to maintaining favourable financing conditions for all sectors and jurisdictions. In addition, the European Commission has recently published some guidelines for government guarantee schemes in order to avoid