European Central Bank — Economic Bulletin (Europe, 2016)

Economic Bulletin Issue 2 / 2016 30 53%100%3,5E7,5E6EEEE80 6E6EE Contents Economic and monetary developments Overview 1 External environment 2 Financial developments 3 Economic activity 4 Prices and costs 5 Money and credit 6 Fiscal developments Boxes 1 2 3 The slowdown in US labour productivity growth   stylised facts and economic implications Current oil price trends Liquidity conditions and monetary policy operations in the period from 28 October 2015 to 26 January 2016 4 Factors behind the comparatively strong activity in euro area services 5 6 7 8 The impact of the oil price decline on the current account surplus of the euro area Oil prices and euro area consumer energy prices The relationship between HICP inflation and HICP inflation excluding energy and food The 2016 macroeconomic imbalance procedure and the implementation of the 2015 country-specific recommendations articles 1 Transmission of output shocks   the role of cross-border production chains 2 Public investment in Europe Statistics 3 7 13 16 21 25 30 34 38 40 45 49 51 54 57 61 75 S1 2 ECB Economic Bulletin, Issue 2 / 2016   Contents Economic and monetary developments Overview at its monetary policy meeting on 10 march 2016, based on the regular economic and monetary analyses, the governing Council conducted a thorough review of the monetary policy stance, in which it also took into account the new macroeconomic projections by ECB staff extending into the year 2018. As a result, the Governing Council decided on a set of measures in the pursuit of its price stability objective. This comprehensive package will exploit the synergies between the different instruments and has been calibrated to further ease financing conditions, stimulate new credit provision and thereby reinforce the momentum of the euro area s economic recovery and accelerate the return of inflation to levels below, but close to, 2%. Economic and monetary assessment at the time of the Governing Council meeting of 10 March 2016 global activity moderated at the turn of the year, and is expected to continue expanding at a modest pace. Low interest rates, improving labour markets and rising confidence support the outlook for advanced economies. By contrast, the medium- term outlook for emerging market economies remains more uncertain. Economic activity in China is expected to continue decelerating, with negative spillovers to other emerging market economies, particularly in Asia, while commodity exporting countries need to adjust further to lower commodity prices. In this context, the effective exchange rate of the euro has appreciated significantly over recent months. Financial markets have shown heightened volatility in recent months. Initially, global growth concerns contributed to a decline in the prices of riskier financial assets from the beginning of December 2015 to mid-February. However, more recently, these declines have been partly reversed, related to reduced investor concerns amid a rise in oil prices, better than expected economic data in the United States and expectations of further monetary policy stimulus in the euro area. Sovereign bond yields in higher- rated countries have declined further in the last three months. The economic recovery in the euro area is continuing, albeit with lower than expected growth at the beginning of the year on the back of a weaker external environment. Real GDP rose by 0.3%, quarter on quarter, in the fourth quarter of 2015, supported by domestic demand, while being dampened by a negative contribution from net exports. The most recent survey data point to weaker than expected growth momentum at the beginning of this year. 3 ECB Economic Bulletin, Issue 2 / 2016   Economic and monetary developments Looking ahead, the economic recovery is expected to proceed at a moderate pace. Domestic demand should be further supported by the ECB s monetary policy measures and their favourable impact on financing conditions, as well as by continued employment gains from past structural reforms. Moreover, the low price of oil should provide additional support for households  real disposable income and private consumption, as well as for corporate profitability and investment. In addition, the fiscal stance in the euro area is slightly expansionary, partly reflecting measures in support of refugees. However, the economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms. The march 2016 ECB staff macroeconomic projections for the euro area foresee annual real gDP increasing by 1.4% in 2016, 1.7% in 2017 and 1.8% in 2018. Compared with the December 2015 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised slightly down, mainly reflecting the weakened growth prospects for the global economy. In the Governing Council s assessment, risks to the euro area growth outlook remain tilted to the downside and relate in particular to the heightened uncertainties regarding developments in the global economy, as well as to broader geopolitical risks. according to Eurostat s flash estimate, euro area annual HICP inflation was -0.2% in February 2016, compared with 0.3% in January. All main HICP components contributed to this decline. Inflation rates should recover later in 2016 and rise further thereafter, supported by the ECB s monetary policy measures and the expected economic recovery. The march 2016 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018. In comparison with the December 2015 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down, mainly reflecting the fall in oil prices over recent months. The Governing Council will closely monitor price-setting behaviour and wage developments in the euro area, paying particular attention to ensure that the current low inflation environment does not become entrenched in second-round effects on wage and price-setting. The ECB s monetary policy measures continue to be transmitted to lending conditions and remain supportive of broad money and credit dynamics. Money growth has remained solid, while loan growth has continued on the path of gradual recovery observed since the beginning of 2014. Domestic sources of money creation continue to be the main driver of broad money growth. Low interest rates, as well as the effects of the ECB s targeted longer-term refinancing operations (TLTROs) and the expanded asset purchase programme (APP), have contributed to improvements in money and credit dynamics. Banks  funding costs have stabilised close to their historical lows. Despite considerable cross-country heterogeneity, banks have been passing on their favourable funding conditions in the form of lower lending rates. Improved lending conditions have continued to support a recovery in loan growth. The total annual flow of external financing to non-financial corporations is estimated to have increased further in the fourth quarter of 2015, after stabilising in the 4 ECB Economic Bulletin, Issue 2 / 2016   Economic and monetary developments previous two quarters. Overall, the monetary policy measures in place since June 2014 have improved borrowing conditions for firms and households substantially. Monetary policy decisions The governing Council assessed that a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for further monetary stimulus in order to secure a return of inflation rates towards levels below, but close to, 2% without undue delay. Economic and financial conditions had weakened further since the last meeting of the Governing Council in January and risks to the Governing Council s medium-term price stability objective had clearly increased, as also indicated by the downward revisions for inflation and growth in the March 2016 staff macroeconomic projections. As a result, the Governing Council decided on a set of measures in the pursuit of its price stability objective.   First, as regards the key ECB interest rates, the Governing Council decided to lower the interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00% and the rate on the marginal lending facility by 5 basis points to 0.25%. The rate on the deposit facility was lowered by 10 basis points to -0.40%.   Second, the Governing Council decided to expand the monthly purchases under the APP from  60 billion to  80 billion. They are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term. To ensure the continued smooth implementation of the asset purchases, the Governing Council also decided to increase the issuer and issue share limits for the purchases of securities issued by eligible international organisations and multilateral development banks from 33% to 50%.     Third, the Governing Council decided to include investment-grade euro- denominated bonds issued by non-bank corporations established in the euro area in the list of assets that are eligible for regular purchases under a new corporate sector purchase programme. This will further strengthen the pass- through of the Eurosystem s asset purchases to the financing conditions of the real economy. Purchases under the new programme will start towards the end of the second quarter of this year. Fourth, the