European Central Bank — Economic Bulletin (Europe, 2021)

Economic Bulletin Issue 6 / 2021 Contents Economic, financial 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 Comparing recent inflation developments in the United States and the euro area Liquidity conditions and monetary policy operations from 28 April to 27 July 2021 Non-financial corporate health during the pandemic The impact of supply bottlenecks on trade EU emissions allowance prices in the context of the ECB s climate change action plan Articles 1 2 Hours worked in the euro area TLTRO III and bank lending conditions Statistics 2 2 6 16 22 30 37 45 49 49 57 63 72 78 83 83 104 S1 ECB Economic Bulletin, Issue 6 / 2021   Contents 1 Economic, financial and monetary developments Overview Economic activity The recovery in global economic activity continues, although persisting supply bottlenecks and the spread of the more contagious Delta variant of the coronavirus (COVID-19) cast a shadow over the near-term growth prospects. Recent surveys signal some easing in the growth momentum, particularly among emerging market economies. Compared with the previous projections, the growth outlook for the global economy in the September 2021 ECB staff macroeconomic projections has been slightly revised upwards, especially in 2022. Global real GDP growth (excluding the euro area) is projected to increase to 6.3% this year, before slowing to 4.5% in 2022 and 3.7% in 2023. Euro area foreign demand has been revised upwards compared with the previous projections. It is projected to expand by 9.2% this year and by 5.5% and 3.7% in 2022 and 2023 respectively. This mainly reflects the fact that global imports were stronger at the start of 2021 than previously projected, as well as the greater procyclicality of trade during an economic recovery. The export prices of euro area competitors have been revised upwards for this year amid higher commodity prices and stronger demand. Risks to the baseline projections for the global economy relate mainly to the future course of the pandemic. Other risks to the global outlook are judged to be tilted to the downside for global growth and to the upside for global inflation. The euro area economy rebounded by 2.2% in the second quarter of the year, which was more than expected, and is on track for strong growth in the third quarter. The recovery builds on the success of the vaccination campaigns in Europe, which have allowed a significant reopening of the economy. With the lifting of restrictions, the services sector is benefiting from people returning to shops and restaurants and from the rebound in travel and tourism. Manufacturing is performing strongly, even though production continues to be held back by shortages of materials and equipment. The spread of the Delta variant has so far not required lockdown measures to be reimposed. But it could slow the recovery in global trade and the full reopening of the economy. Consumer spending is increasing, although consumers remain somewhat cautious in the light of the pandemic developments. The labour market is also improving rapidly, which holds out the prospect of higher incomes and greater spending. Unemployment is declining and the number of people in job retention schemes has fallen by about 28 million from the peak last year. The recovery in domestic and global demand is further boosting optimism among firms, which is supporting business investment. At the same time, there remains some way to go ECB Economic Bulletin, Issue 6 / 2021   Economic, financial and monetary developments Overview 2 before the damage to the economy caused by the pandemic is overcome. There are still more than two million fewer people employed than before the pandemic, especially among the younger and lower skilled. The number of workers in job retention schemes also remains substantial. After a significant fiscal expansion since the start of the pandemic, only limited additional stimulus measures have been adopted over the last few months, as 2022 budgetary plans are still in preparation and the economic recovery seems to be proceeding somewhat faster than anticipated. As a result, the September 2021 ECB staff macroeconomic projections include a fiscal outlook for the euro area that has improved compared with June. While the deficit ratio is projected to remain high in 2021, at 7.1%, after 7.3% in 2020, the subsequent improvement is foreseen to be swift as the pandemic abates and the economic recovery takes hold. The deficit ratio is thus expected to fall to 3.0% in 2022 and 2.1% at the end of the projection horizon in 2023. Mirroring these developments, euro area debt is projected to peak at just below 99% of GDP in 2021 and to decline to about 94% of GDP in 2023. To support the recovery, ambitious, targeted and coordinated fiscal policy should continue to complement monetary policy. In particular, the Next Generation EU programme will help ensure a stronger and uniform recovery across euro area countries. It will also accelerate the green and digital transitions, support structural reforms and lift long-term growth. The economy is expected to rebound firmly over the medium term. The September 2021 ECB staff macroeconomic projections foresee annual real GDP growth at 5.0% in 2021, 4.6% in 2022 and 2.1% in 2023. Compared with the June 2021 Eurosystem staff macroeconomic projections, the outlook has improved for 2021, largely on account of stronger than expected outcomes in the first half of the year, and is broadly unchanged for 2022 and 2023. Inflation Euro area inflation increased to 3.0% in August. Inflation is expected to rise further this autumn, but to decline next year. The current increase in inflation is expected to be largely temporary, mainly reflecting the strong increase in oil prices since around the middle of last year, the reversal of the temporary VAT reduction in Germany, delayed summer sales in 2020 and cost pressures that stem from temporary shortages of materials and equipment. In the course of 2022 these factors should ease or will fall out of the year-on-year inflation calculation. Underlying inflation pressures have edged up. As the economy recovers further, and supported by the Governing Council s monetary policy measures, underlying inflation is expected to rise over the medium term. This increase is expected to be only gradual, since it will take time for the economy to return to operating at full capacity, and therefore wages are expected to grow only moderately. Measures of longer-term inflation expectations have continued to increase, but these remain some distance from the ECB s 2% target. ECB Economic Bulletin, Issue 6 / 2021   Economic, financial and monetary developments Overview 3 This assessment is reflected in the September 2021 ECB staff macroeconomic projections, which foresee annual inflation at 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023, being revised up compared with the previous projections in June. Inflation excluding food and energy price inflation is projected to average 1.3% in 2021, 1.4% in 2022 and 1.5% in 2023, also being revised up from the June projections. Risk assessment The Governing Council sees the risks to the economic outlook as broadly balanced. Economic activity could outperform the ECB s expectations if consumers become more confident and save less than currently expected. A faster improvement in the pandemic situation could also lead to a stronger expansion than currently envisaged. If supply bottlenecks last longer and feed through into higher than anticipated wage rises, price pressures could be more persistent. At the same time, the economic outlook could deteriorate if the pandemic worsens, which could delay the further reopening of the economy, or if supply shortages turn out to be more persistent than currently expected and hold back production. Financial and monetary conditions The recovery of growth and inflation still depends on favourable financing conditions for all sectors of the economy. Market interest rates have eased over the summer, but reversed recently. Overall, financing conditions for the economy remain favourable. While the forward curve of the euro overnight index average (EONIA) decreased markedly across medium maturities, the short end of the curve has remained largely unchanged, suggesting no expectations of an imminent policy rate change in the very near term. Over the review period (10 June to 8 September 2021), long-term risk-free rates first decreased, reflecting inter alia the ECB s revised rate forward guidance communicated after the July Governing Council meeting, following the release of the new monetary policy strategy, and subsequently retraced part of this move in the last weeks of the period. Sovereign spreads over the overnight index swap (OIS) rate remained broadly unchanged across jurisdictions. Risk assets showed overall resilience against rising concerns about the spreading of the Delta variant. Equity prices increased, mainly supported by a strong recovery in corporate earnings growth expectations, which was only partly counterbalanced by an increase in equity risk premia. Mirroring the increase in equity prices, euro area corporate bond spreads continued to tighten. Money creation in the euro area moderated in July 2021, normalising further after the significant monetary expansion associated with the earlier waves of the pandemic. Domestic credit remained the dominant driver of money creation, with Eurosystem asset purchases being the most prominent contributor. Growth in lending to the private sector stabilised close to lower, pre-pandemic, long-term ECB Economic B