European Central Bank — Economic Bulletin (Europe, 2024)

Economic Bulletin Issue 1 / 2024 Contents Update on 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 Global trade in the post-pandemic environment Is the PMI a reliable indicator for nowcasting euro area real GDP? Main findings from the ECB s recent contacts with non-financial companies Assessing the macroeconomic effects of climate change transition policies Corporate vulnerabilities as reported by firms in the SAFE Policy expectation errors during the recent tightening cycle   insights from the ECB s Survey of Monetary Analysts Estimates of the natural interest rate for the euro area: an update Fiscal policy measures in response to the energy and inflation shock and climate change Article 1 The Eurosystem policy response to developments in retail payments Box 1 Developments in consumers  attitudes and preferences Statistics ECB Economic Bulletin, Issue 1 / 2024   Contents 2 2 6 11 18 24 27 36 36 43 47 51 57 63 66 70 74 74 77 S1 1 Update on economic, financial and monetary developments Summary At its meeting on 25 January 2024, the Governing Council decided to keep the three key ECB interest rates unchanged. The incoming information broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy- related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions. Tight financing conditions are dampening demand, and this is helping to push down inflation. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council s 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. Economic activity The euro area economy is likely to have stagnated in the final quarter of 2023.1 The incoming data continue to signal weakness in the near term. However, some forward-looking survey indicators point to a pick-up in growth further ahead. The labour market has remained robust. The unemployment rate, at 6.4% in November, has fallen back to its lowest level since the start of the euro and more workers have entered the labour force. At the same time, demand for labour is slowing, with fewer vacancies being advertised. Governments should continue to roll back energy-related support measures to avoid driving up medium-term inflationary pressures. Fiscal and structural policies should be designed to make the euro area economy more productive and competitive, as well as to gradually bring down high public debt ratios. Structural reforms and investments to enhance the euro area s supply capacity   which would be supported 1 The cut-off date for data included in this issue of the Economic Bulletin was 24 January 2024. According to the preliminary flash estimate released by Eurostat on 30 January 2024, euro area real GDP was unchanged from the third quarter to the fourth quarter of 2023. ECB Economic Bulletin, Issue 1 / 2024   Update on economic, financial and monetary developments Summary 2 by the full implementation of the Next Generation EU programme   can help reduce price pressures in the medium term, while supporting the green and digital transitions. Following the recent ECOFIN Council agreement on the reform of the EU s economic governance framework, the legislative process should be concluded swiftly so that the new rules can be implemented without delay. Moreover, it is imperative that progress towards capital markets union and the completion of banking union be accelerated. Inflation Inflation rose to 2.9% in December 2023 as some of the past fiscal measures to cushion the impact of high energy prices dropped out of the annual inflation rate, although the rebound was weaker than expected.2 Aside from this base effect, the overall trend of declining inflation continued. Food price inflation dropped to 6.1% in December. Inflation excluding energy and food also declined again, to 3.4%, due to a fall in goods inflation to 2.5%. Services inflation was stable at 4.0%. Inflation is expected to ease further over the course of 2024 as the effects of past energy shocks, supply bottlenecks and the post-pandemic reopening of the economy fade, and tighter monetary policy continues to weigh on demand. Almost all measures of underlying inflation declined further in December. The elevated rate of wage increases and falling labour productivity are keeping domestic price pressures high, although these too have started to ease. At the same time, lower unit profits have started to moderate the inflationary effect of rising unit labour costs. Measures of shorter-term inflation expectations have come down markedly, while those of longer-term inflation expectations mostly stand 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 key 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 rising real incomes mean 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 hamper 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 2 According to Eurostat s flash estimate of 1 February 2024, HICP inflation declined to 2.8% in January 2024. ECB Economic Bulletin, Issue 1 / 2024   Update on economic, financial and monetary developments Summary 3 by more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Moreover, inflation could decline more quickly in the near term if energy prices evolve in line with the recent downward shift in market expectations of the future path for oil and gas prices. Financial and monetary conditions Market interest rates have moved broadly sideways since the Governing Council s monetary policy meeting on 14 December 2023. The Governing Council s restrictive monetary policy continues to transmit strongly into broader financing conditions. Lending rates on business loans declined slightly, to 5.2% in November, while mortgage rates increased further to 4.0%. High borrowing rates, with the associated cutbacks in investment plans and house purchases, led to a further drop in credit demand in the fourth quarter of 2023, as reported in the January 2024 euro area bank lending survey. While the tightening of credit standards for loans to firms and households moderated, they remained tight, with banks concerned about the risks faced by their customers. Against this background, credit dynamics have improved somewhat but overall remain weak. Loans to firms stagnated in November 2023 compared with a year earlier   after contracting in October   as the monthly flow of short-term loans rebounded. Loans to households grew at a subdued annual rate of 0.5%. 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 the pandemic emergency purchase programme (PEPP) during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by  7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024. The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic. As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted ECB Economic Bulletin, Issue 1 / 2024   Update on economic, financial and monetary developments Summary 4 lending operations and their ongoing repayment are contributing to its mon