European Central Bank — Economic Bulletin (Europe, 2019)

Economic Bulletin Issue 8 / 2019 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 The effects of tariff hikes in a world of global value chains Market reaction to the two-tier system Liquidity conditions and monetary policy operations in the period from 31 July to 29 October 2019 Indicators of labour market conditions in the euro area Recent developments in social security contributions and minimum wages in the euro area Export activities of euro area SMEs: insights from the Survey on the Access to Finance of Enterprises (SAFE) The review of draft budgetary plans for 2020   some implications for a reform of fiscal governance Articles 1 2 3 Statistics What does the bank lending survey tell us about credit conditions for euro area firms? The effects of changes in the composition of employment on euro area wage growth The performance of the Eurosystem/ECB staff macroeconomic projections since the financial crisis ECB Economic Bulletin, Issue 8 / 2019   Contents 2 2 6 13 18 22 27 33 36 36 42 46 52 56 60 64 68 68 84 106 S1 1 Economic and monetary developments Overview Based on the assessment of the economic and inflation outlook for the euro area, also taking into account the latest Eurosystem staff macroeconomic projections, the Governing Council decided at its monetary policy meeting on 12 December to keep the key ECB interest rates unchanged and to reiterate its forward guidance on policy rates, net asset purchases and reinvestments. Incoming information since the last Governing Council meeting in late October points to continued muted inflation pressures and weak euro area growth dynamics, although there are some initial signs of stabilisation in the growth slowdown and of a mild increase in underlying inflation in line with previous expectations. Ongoing employment growth and increasing wages continue to underpin the resilience of the euro area economy. Against this overall background and in the light of the subdued inflation outlook, the Governing Council reiterated the need for monetary policy to remain highly accommodative for a prolonged period of time to support underlying inflation pressures and headline inflation developments over the medium term. In addition, the Governing Council s forward guidance ensures that financial conditions adjust in accordance with changes to the inflation outlook. In any event, the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aims in a sustained manner, in line with its commitment to symmetry. Economic and monetary assessment at the time of the Governing Council meeting of 12 December 2019 Global real GDP growth (excluding the euro area) weakened during the first half of 2019, but signs of stabilisation started to emerge towards the end of the year. The weak growth momentum was characterised by slowing growth in both manufacturing and investment, which have been reinforced by rising policy and political uncertainty particularly amid escalating trade tensions and Brexit-related developments. More recent information, however, points to a stabilisation in global growth, as confirmed also by survey-based data. In particular, the Purchasing Managers  Indices (PMI) point to a moderate recovery in manufacturing output growth and some moderation in services output growth. Looking ahead, the recovery in global economic activity is projected to be shallow, reflecting a moderation of growth in advanced economies and a sluggish recovery in some emerging economies. Global trade softened this year and is projected to expand at a slower pace than global activity in the medium term. Global inflationary pressures remain contained, and the balance of risks to global economic activity continues to be tilted to the downside, although risks are becoming less pronounced. Since the Governing Council meeting in September 2019 euro area long-term risk-free rates have increased and the forward curve of the euro overnight index ECB Economic Bulletin, Issue 8 / 2019   Economic and monetary developments Overview 2 average (EONIA) has shifted upwards, with markets currently expecting no further cut in the deposit facility rate. In line with an improvement in global risk sentiment, euro area equity prices have increased and corporate spreads have tightened. Euro area long-term sovereign yields also largely reflect the rise in risk-free rates. In foreign exchange markets, the euro remained broadly stable in trade-weighted terms. Euro area real GDP growth was confirmed at 0.2%, quarter on quarter, in the third quarter of 2019, unchanged from the previous quarter. The ongoing weakness of international trade in an environment of persistent global uncertainties continues to weigh on the euro area manufacturing sector and is dampening investment growth. At the same time, incoming economic data and survey information, while remaining weak overall, point to some stabilisation in the slowdown of economic growth in the euro area. The services and construction sectors remain resilient, despite some moderation in the latter half of 2019. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains in conjunction with rising wages, the mildly expansionary euro area fiscal stance and the ongoing   albeit somewhat slower   growth in global activity. This assessment is broadly reflected in the December 2019 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.2% in 2019, 1.1% in 2020 and 1.4% in both 2021 and 2022. Compared with the September 2019 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised down slightly for 2020. The risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become somewhat less pronounced. According to Eurostat s flash estimate, euro area annual HICP inflation increased from 0.7% in October 2019 to 1.0% in November, reflecting mainly higher services and food price inflation. On the basis of current futures prices for oil, headline inflation is likely to rise somewhat in the coming months. Indicators of inflation expectations stand at low levels. Measures of underlying inflation have remained generally muted, although there are some indications of a mild increase in line with previous expectations. While labour cost pressures have strengthened amid tighter labour markets, the weaker growth momentum is delaying their pass-through to inflation. Over the medium term, inflation is expected to increase, supported by the Governing Council s monetary policy measures, the ongoing economic expansion and solid wage growth. This assessment is also broadly reflected in the December 2019 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.1% in 2020, 1.4% in 2021 and 1.6% in 2022. Compared with the September 2019 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised up slightly for 2020 and down slightly for 2021, mainly driven by the expected future path of energy prices. Annual HICP inflation excluding energy and food is expected to be 1.0% in 2019, 1.3% in 2020, 1.4% in 2021 and 1.6% in 2022. ECB Economic Bulletin, Issue 8 / 2019   Economic and monetary developments Overview 3 In October 2019 the annual growth of broad money remained robust, while lending to the private sector continued its gradual recovery. Broad money (M3) growth stood at 5.6% in October 2019, unchanged from the previous month. Sustained rates of broad money growth reflect ongoing bank credit creation for the private sector and low opportunity costs of holding M3. At the same time, favourable bank funding and lending conditions continued to support loan flows and thereby economic growth. The annual growth rate of loans to non-financial corporations increased to 3.8% in October, up from 3.6% in September. The Governing Council s accommodative monetary policy stance will help to safeguard very favourable bank lending conditions and will continue to support access to financing, across all economic sectors and in particular for small and medium-sized enterprises. The aggregate fiscal stance for the euro area is expected to remain mildly expansionary in 2020, thus providing support to economic activity. The stance is expected to remain expansionary in 2021 and to stabilise in 2022, mainly on account of a declining but still positive primary balance. In view of the weakening economic outlook, governments with fiscal space should be ready to act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies and meet structural balance targets, which will create the conditions for automatic stabilisers to operate freely. All countries should intensify their efforts to achieve a more growth-friendly composition of public finances. Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council decided at its monetary policy meeting on 12 December to keep the key ECB interest rates unchanged and to reiterate its forward guidance on policy rates, net asset purchases and reinvestments:       First, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converg