European Central Bank — Economic Bulletin (Europe, 2017)

Economic Bulletin Issue 2 / 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 EME financial market developments after the 2016 US presidential election compared with developments after the 2013 tapering talk episode Analysing euro area net portfolio investment outflows Impact of the ECB s non-standard measures on financing conditions: taking stock of recent evidence Liquidity conditions and monetary policy operations in the period from 26 October 2016 to 24 January 2017 New euro area statistics on insurance corporations Conceptual issues surrounding the measurement of fiscal space The 2017 macroeconomic imbalance procedure and implementation of the 2016 country-specific recommendations Articles 1 2 The impact of global value chain participation on current account balances   a global perspective Firm heterogeneity and competitiveness in the European Union 2 2 5 11 16 21 26 33 37 37 41 46 52 57 59 63 68 68 83 Statistics (cid:3)(cid:3)(cid:3)(cid:3)S1 ECB Economic Bulletin, Issue 2 / 2017 1 Economic and monetary developments Overview At its monetary policy meeting on 9 March 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 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. The ongoing pass-through of these measures to borrowing conditions for firms and households benefits credit creation and supports the steadily firming recovery of the euro area economy. Headline inflation has again increased, largely on account of rising energy and food price inflation. However, underlying inflation pressures continue to remain subdued. The Governing Council will continue to look through changes in HICP inflation if judged to be transient and to have no implication for the medium-term outlook for price stability. Economic and monetary assessment at the time of the Governing Council meeting of 9 March 2017 Global activity has continued its recovery. Global growth improved in the second half of last year and is expected to have remained sustained at the start of 2017, albeit at a modest pace from a historical perspective. Global headline inflation has increased in recent months, following the rebound in oil prices, while slowly diminishing spare capacity is expected to give some support to underlying inflation over the medium term. Since the Governing Council s monetary policy meeting in December 2016 euro area sovereign bond yields have risen slightly and have exhibited some volatility. Corporate bond spreads have fallen and remain lower than the levels recorded in early March 2016 when the corporate sector purchase programme was announced. Broad equity prices have risen in the euro area and a similar increase has been observed in the United States. The value of the euro has depreciated slightly in trade-weighted terms. The economic recovery in the euro area is steadily firming. Euro area real GDP increased by 0.4%, quarter on quarter, in the fourth quarter of 2016, following a similar pace of growth in the third quarter. Incoming data, notably survey results, have increased the Governing Council s confidence that the ongoing economic expansion will continue to firm and broaden. Looking ahead, the pass-through of the ECB s monetary policy measures is supporting domestic demand and facilitates the ongoing deleveraging process. The recovery in investment continues to be promoted by very favourable ECB Economic Bulletin, Issue 2 / 2017   Economic and monetary developments Overview 2 financing conditions and improvements in corporate profitability. Moreover, rising employment, which is also benefiting from past structural reforms, is having a positive impact on households  real disposable income, thereby providing support for private consumption. In addition, there are signs of a somewhat stronger global recovery and increasing global trade. However, economic growth in the euro area is expected to be dampened by a sluggish pace of implementation of structural reforms and remaining balance sheet adjustment needs in a number of sectors. The March 2017 ECB staff macroeconomic projections for the euro area foresee annual real GDP increasing by 1.8% in 2017, by 1.7% in 2018 and by 1.6% in 2019. Compared with the December 2016 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised upwards slightly for 2017 and 2018. The risks surrounding the euro area growth outlook have become less pronounced, but remain tilted to the downside and relate predominantly to global factors. According to Eurostat s flash estimate, euro area annual HICP inflation increased further to 2.0% in February, up from 1.8% in January 2017 and 1.1% in December 2016. This reflected mainly a strong increase in annual energy and unprocessed food price inflation, with no signs yet of a convincing upward trend in underlying inflation. Looking ahead, headline inflation is likely to remain at levels close to 2% in the coming months, largely reflecting movements in the annual rate of change of energy prices. Measures of underlying inflation, however, have remained low. They are expected to rise only gradually over the medium term, supported by the ECB s monetary policy measures, the expected continuing economic recovery and the corresponding gradual absorption of slack. The March 2017 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation at 1.7% in 2017, 1.6% in 2018 and 1.7% in 2019. By comparison with the December 2016 Eurosystem staff macroeconomic projections, the outlook for headline HICP inflation has been revised upwards significantly for 2017 and slightly for 2018, while remaining unchanged for 2019. The staff projections are conditional on the full implementation of all the ECB s monetary policy measures. The ECB s monetary policy measures put in place since June 2014 are providing significant support for borrowing conditions for firms and households and thereby credit flows across the euro area. Broad money growth remained generally stable in January 2017. At the same time, lending to the private sector continued its gradual recovery in the fourth quarter of 2016 and in January. Low interest rates and the effects of the ECB s non-standard monetary policy measures continue to support the financing conditions of the real economy. The annual flow of total external financing to non-financial corporations is estimated to have strengthened further in the fourth quarter of 2016. Over the coming years, the general government budget deficit and debt ratios for the euro area are projected to remain on a downward path. The euro area ECB Economic Bulletin, Issue 2 / 2017   Economic and monetary developments Overview 3 fiscal stance, which was mildly expansionary in 2016, is projected to turn broadly neutral in 2017-19. However, euro area countries  follow-up to the European Commission s review of their draft budgetary plans for 2017 has been unsatisfactory, as none the countries that were considered at risk of non-compliance with the Stability and Growth Pact has implemented significant measures. 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% without undue delay. The Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at present or lower 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 it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of  80 billion until the end of March 2017 and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of  60 billion 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 asset purchase programme in terms of size and/or duration. ECB Economic Bulletin, Issue 2 / 2017   Economic and monetary developments Overview 4 1 External environment Global activity improved in the second half of last year and growth is expected to remain sustained in the first quarter of 2017, albeit at a modest pace when seen in historical perspective. Global headline inflation has increased in recent months, following the rebound in oil prices, while slowly diminishing spare capacity is expected to give some support to underlying inflation over the medium term. Global economic activity and trade Global growth is expected to remain sustained, albeit modest by historical comparison. Recent data releases confirm the improv