European Central Bank — Economic Bulletin (Europe, 2017)

Economic Bulletin Issue 4 / 2017 Contents Economic 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 The recent evolution of global risks   an assessment The ECB s corporate sector purchase programme: its implementation and impact Liquidity conditions and monetary policy operations in the period from 25 January to 2 May 2017 Recent developments in the euro area current account balance Private sector indebtedness and deleveraging in the euro area countries Which sectors sold the government securities purchased by the Eurosystem? Country-specific recommendations for fiscal policies under the 2017 European Semester The fiscal compact: the Commission s review and the way forward Article 1 Domestic and global drivers of inflation in the euro area Statistics ECB Economic Bulletin, Issue 4 / 2017 2 2 5 10 15 21 26 33 36 36 40 46 50 55 61 65 69 72 72 S1 1 Economic and monetary developments Overview At its monetary policy meeting on 8 June 2017, the Governing Council concluded that a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term. The information that has become available since the previous monetary policy meeting in late April confirms a stronger momentum in the euro area economy, which is projected to expand at a somewhat faster pace than previously expected. The Governing Council considers that the risks to the growth outlook are now broadly balanced. Against this background, very adverse scenarios for the outlook for price stability have become increasingly unlikely to materialise, in particular as deflation risks have largely vanished. Hence, the Governing Council decided to drop the reference to lower interest rates from its forward guidance on policy rates. At the same time, the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued and have yet to show a convincing upward trend. Therefore, the very substantial degree of monetary accommodation remains appropriate. Economic and monetary assessment at the time of the Governing Council meeting of 8 June 2017 The ECB s monetary policy measures have continued to preserve the very favourable financing conditions that are necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. This is evident in continued very low bank interest rates. Likewise, the pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing, notably for small and medium-sized enterprises, and, hence, credit flows across the euro area. Broad money continues to expand at a robust pace, while the recovery in loan growth to the private sector observed since the beginning of 2014 is proceeding. The ongoing economic expansion in the euro area is increasingly resilient and has broadened across sectors and countries. Euro area real GDP increased by 0.6%, quarter on quarter, in the first quarter of 2017, after 0.5% in the last quarter of 2016. Short-term indicators such as surveys continue to point to robust growth momentum in the near term. The pass-through of the ECB s monetary policy measures has also facilitated the deleveraging process and should continue to support domestic demand. In particular, the recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Employment gains, which are also benefiting from past labour market reforms, are supporting real disposable income and private consumption. ECB Economic Bulletin, Issue 4 / 2017   Economic and monetary developments Overview 2 Euro area activity is further supported by a sustained global recovery. Global trade growth has increased significantly in recent months, benefiting from, among other factors, the recoveries in emerging market economies. However, euro area economic growth prospects continue to be dampened by a sluggish pace of implementation of structural reforms, in particular in product markets, and by remaining balance sheet adjustment needs in a number of sectors, notwithstanding ongoing improvements. The June 2017 Eurosystem staff macroeconomic projections for the euro area, finalised in late May, which are conditional on the full implementation of all ECB monetary policy measures, foresee annual real GDP increasing by 1.9% in 2017, by 1.8% in 2018 and by 1.7% in 2019. Compared with the March 2017 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised upwards over the projection horizon. The risks surrounding the euro area growth outlook are considered to be broadly balanced. On the one hand, the current positive cyclical momentum increases the chances of a stronger than expected economic upswing. On the other hand, downside risks relating to predominantly global factors continue to exist. According to Eurostat s flash estimate, euro area annual HICP inflation was 1.4% in May, following 1.9% in April and 1.5% in March. As expected, the recent volatility in inflation rates was mainly due to energy prices and temporary increases in services prices over the Easter period. Following the recent fall in oil prices, global headline inflation has stabilised. Looking ahead, on the basis of current futures prices for oil, headline inflation in the euro area is likely to remain around recent levels in the coming months. Measures of underlying inflation have remained low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation. Underlying inflation is expected to rise only gradually over the medium term, supported by the ECB s monetary policy measures, the continuing economic expansion and the corresponding gradual absorption of economic slack. The June 2017 Eurosystem staff macroeconomic projections for the euro area foresee annual HICP inflation at 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019. By comparison with the March 2017 ECB staff macroeconomic projections, the outlook for headline HICP inflation has been revised downwards, mainly reflecting lower oil prices. The euro area budget deficit is projected to fall further over the projection horizon (2017-19), mainly as a result of improving cyclical conditions and decreasing interest payments. The aggregate fiscal stance for the euro area is projected to be broadly neutral over the period 2017-19. The euro area government debt-to-GDP ratio, although still high, is projected to continue to decline. Countries with high levels of public debt would benefit from additional consolidation efforts to set their debt-to-GDP ratio firmly on a downward path. ECB Economic Bulletin, Issue 4 / 2017   Economic and monetary developments Overview 3 Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council confirmed the need for a continued very substantial degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%. The Governing Council decided to keep the key ECB interest rates unchanged and expects them to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. Regarding non-standard monetary policy measures, the Governing Council confirmed that the net asset purchases under the asset purchase programme (APP), at the current monthly pace of  60 billion, are intended to run until the end of December 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 inflation aim. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP. Moreover, the Governing Council confirmed that if the outlook became less favourable, or if financial conditions became inconsistent with further progress towards a sustained adjustment in the path of inflation, it would stand ready to increase the APP in terms of size and/or duration. ECB Economic Bulletin, Issue 4 / 2017   Economic and monetary developments Overview 4 1 External environment A temporary dip in global GDP growth in the first quarter of 2017 notwithstanding, global activity growth remained sustained in the first months of the year. Momentum in global trade improved markedly, driven mostly by increased trade from emerging market economies. Global headline inflation has stabilised in recent months, as the effect of past commodity price increases has diminished. However, oil prices have declined in recent weeks, which should dampen global inflation rates in the short term. Global economic activity and trade A temporary dip in global GDP growth in the first quarter of 2017 notwithstanding, global activity growth remained sustained at the start of year. In the United States, GDP growth fell to 0.3% quarter-on-quarter, mainly reflecting weaker consumer spending and a large reduction in inventory investment spending. In the United Kingdom, GDP growth also declined, as higher inflation following the depreciation of the pound sterling squeezed real incomes and household spending. In China, the decline in GDP growth to 1.3% quarter-on-quarter was somewhat at odds with more upbeat short-term indicators. On the other hand, GDP growth rebounded sharply in both Russia and Brazil as they