European Central Bank — Economic Bulletin (Europe, 2024)

Economic Bulletin Issue 3 / 2024 Contents Economic, financial and monetary developments Summary External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments 1 2 3 4 5 Boxes 1 2 3 4 5 6 7 8 Recent inflation developments and wage pressures in the euro area and the United States Why did the import intensity of GDP slow down in 2023? How big is the household housing burden? Evidence from the ECB Consumer Expectations Survey Housing investment and the user cost of housing in the euro area Main findings from the ECB s recent contacts with non-financial companies Decomposing HICPX inflation into energy-sensitive and wage- sensitive items The role of technical factors in euro area inflation-linked swap rates The reformed EU fiscal framework   potential macroeconomic implications for the euro area Articles 1 Trust in the ECB   insights from the Consumer Expectations Survey Box 1 Who are the individuals at the extremes of the trust scale? Box 2 Co-movement of trust in different institutions 2 What does new micro price evidence tell us about inflation dynamics and monetary policy transmission? ECB Economic Bulletin, Issue 3 / 2024   Contents 3 3 7 11 18 24 27 36 36 43 47 53 60 64 69 74 79 79 88 92 95 1 Box 1 How price adjustment patterns change with higher inflation: recent evidence from euro area micro consumer price data Box 2 Insights into recent developments in price setting: evidence from micro-level daily price data from online supermarkets Box 3 Price setting during and after the high inflation period: evidence from a survey of large firms Statistics 102 106 110 S1 ECB Economic Bulletin, Issue 3 / 2024   Contents 2 Economic, financial and monetary developments Summary At its meeting on 11 April 2024, the Governing Council decided to keep the three key ECB interest rates unchanged. The incoming information broadly confirmed the Governing Council s previous assessment of the medium-term inflation outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits. Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It considers that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. The Governing Council s future decisions will ensure that the key ECB interest rates will stay sufficiently restrictive for as long as necessary. If the updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase the Governing Council s confidence that inflation is converging to its target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, the Governing Council will continue to follow a data-dependent and meeting- by-meeting approach to determining the appropriate level and duration of restriction, and it is not pre-committing to a particular rate path. Economic activity The economy remained weak in the first quarter of 2024. While spending on services is resilient, manufacturing firms are facing weak demand and production is still subdued, especially in energy-intensive sectors. Surveys point to a gradual recovery over the course of this year, led by services. This recovery is expected to be supported by rising real incomes, resulting from lower inflation, increased wages and improved terms of trade. In addition, the growth of euro area exports should pick up over the coming quarters, as the global economy recovers and spending shifts further towards tradables. Finally, monetary policy should exert less of a drag on demand over time. The unemployment rate is at its lowest level since the start of the euro. At the same time, the tightness in the labour market continues to gradually decline, with employers posting fewer job vacancies. ECB Economic Bulletin, Issue 8 / 2023   Economic, financial and monetary developments Summary 3 Governments should continue to roll back energy-related support measures so that disinflation can proceed sustainably. 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. National fiscal and structural policies should be aimed at making the economy more productive and competitive, which would help to reduce price pressures in the medium term. At the European level, an effective and speedy implementation of the Next Generation EU programme and a strengthening of the Single Market would help foster innovation and increase investment in the green and digital transitions. More determined and concrete efforts to complete the banking union and the capital markets union would help mobilise the massive private investment necessary to achieve this, as the Governing Council stressed in its statement1 of 7 March 2024. Inflation Inflation has continued to decline, from an annual rate of 2.6% in February to 2.4% in March, according to Eurostat s flash estimate. Food price inflation dropped to 2.7% in March, from 3.9% in February, while energy price inflation stood at -1.8% in March, after -3.7% in the previous month. Goods price inflation fell again in March, to 1.1%, from 1.6% in February. However, services price inflation remained high in March, at 4.0%. Most measures of underlying inflation fell further in February, confirming the picture of gradually diminishing price pressures. While domestic inflation remains high, wages and unit profits grew less strongly than anticipated in the last quarter of 2023, but unit labour costs remained high, in part reflecting weak productivity growth. More recent indicators point to further moderation in wage growth. Inflation is expected to fluctuate around current levels in the coming months and to then decline to the 2% target next year, owing to weaker growth in labour costs, the unfolding effects of the Governing Council s restrictive monetary policy, and the fading impact of the energy crisis and the pandemic. Measures of longer-term inflation expectations remain broadly stable, with most standing around 2%. Risk assessment The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy or a further slowdown in global trade would also weigh on euro area growth. Russia s unjustified war against Ukraine and the tragic conflict in the Middle East are major sources of geopolitical risk. This may result in firms and households becoming less confident about the future and global trade being disrupted. Growth could be higher if inflation comes down more quickly than expected and rising real 1 See  Statement by the ECB Governing Council on advancing the Capital Markets Union , press release, ECB, 7 March 2024. ECB Economic Bulletin, Issue 8 / 2023   Economic, financial and monetary developments Summary 4 incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected. Upside risks to inflation include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and disrupt global trade. Inflation could also turn out higher than anticipated if wages increase by more than expected or profit margins prove more resilient. By contrast, inflation may surprise on the downside if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Financial and monetary conditions Market interest rates have been broadly stable since the Governing Council s monetary policy meeting on 7 March 2024 and wider financing conditions remain restrictive. The average interest rate on business loans edged down to 5.1% in February, from 5.2% in January. Mortgage rates were 3.8% in February, down from 3.9% in January. Still elevated borrowing rates and associated cutbacks in investment plans led firms to further reduce their demand for loans in the first quarter of 2024, as reported in the April 2024 euro area bank lending survey. Credit standards for loans remained tight, with a further slight tightening for lending to firms and a moderate easing for mortgages. Against this background, credit dynamics remain weak. Bank lending to firms grew marginally faster in February, at an annual rate of 0.4%, up from 0.2% in January. Growth in loans to households remained unchanged in February, at 0.3% on an annual basis. Broad money   as measured by M3   grew at a subdued rate of 0.4% in February. Monetary policy decisions The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remain unchanged at 4.50%, 4.75% and 4.00% respectively. The asset purchase programme portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities. The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under th