European Central Bank — Economic Bulletin (Europe, 2024)

Economic Bulletin Issue 6 / 2024 Contents Economic, financial and monetary developments Overview External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments Fiscal developments 1 2 3 4 5 6 Boxes 1 2 3 4 5 6 7 Labour productivity growth in the euro area and the United States: short and long-term developments Accounting for nature in euro area economic activity Why are euro area households still gloomy and what are the implications for private consumption? Findings from a survey of leading firms on labour market trends and the adoption of generative AI Recent developments in wages and the role of wage drift Liquidity conditions and monetary policy operations from 17 April to 23 July 2024 Money and credit dynamics in the euro area and a comparison with the United States Articles 1 Past and future challenges for the external competitiveness of the euro area Box 1 Will trade in services continue to act as a buffer for euro area export growth? Box 2 Energy cost differentials and euro area competitiveness 3 3 8 14 22 29 35 41 44 44 49 54 59 64 70 76 85 85 93 96 2 Economic and financial impacts of nature degradation and biodiversity loss 101 ECB Economic Bulletin, Issue 6 / 2024   Contents 1 Box 1 Nature-related risk assessment for Dutch and French financial institutions Statistics 111 S1 ECB Economic Bulletin, Issue 6 / 2024   Contents 2 Economic, financial and monetary developments Overview At its meeting on 12 September 2024, the Governing Council decided to lower the deposit facility rate   the rate through which it steers the monetary policy stance   by 25 basis points. Based on the Governing Council s updated assessment of the inf lation outlook, the dynamics of underlying inf lation and the strength of monetary policy transmission, it was appropriate to take another step in moderating the degree of monetary policy restriction. Recent inf lation data have come in broadly as expected, and the September 2024 ECB staf f macroeconomic projections conf irm the previous inf lation outlook. ECB staf f see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, as in the June 2024 Eurosystem staf f macroeconomic projections. Inf lation is expected to rise again in the latter part of this year, partly because previous sharp f alls in energy prices will drop out of the annual rates. Inf lation should then decline towards the Governing Council s target over the second half of next year. For core inf lation, the projections f or 2024 and 2025 have been revised up slightly, as services inf lation has been higher than expected. At the same time, ECB staf f continue to expect a rapid decline in core inf lation, f rom 2.9% this year to 2.3% in 2025 and 2.0% in 2026. Domestic inf lation remains high as wages are still rising at an elevated pace. However, labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inf lation. Financing conditions remain restrictive, and economic activity is still subdued, ref lecting weak private consumption and investment. ECB staff project that the economy will grow by 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026. This is a slight downward revision compared with the June projections, mainly owing to a weaker contribution from domestic demand over the next f ew quarters. The Governing Council is determined to ensure that inf lation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive f or as long as necessary to achieve this aim. The Governing Council will continue to f ollow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, the Governing Council s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre- committing to a particular rate path. ECB Economic Bulletin, Issue 6 / 2024   Economic, financial and monetary developments Overview 3 3 Economic activity The economy grew by 0.2% in the second quarter, af ter 0.3% in the f irst quarter, f alling short of the June 2024 Eurosystem staff macroeconomic projections. Growth stemmed mainly f rom net exports and government spending. Private domestic demand weakened, as households consumed less, f irms cut business investment and housing investment dropped. While services supported growth, industry and construction contributed negatively. According to survey indicators, the recovery is continuing to f ace some headwinds. The labour market remains resilient. The unemployment rate was broadly unchanged in July, at 6.4%. At the same time, employment growth slowed to 0.2% in the second quarter, from 0.3% in the f irst. Recent survey indicators point to a f urther moderation in demand for labour, and the job vacancy rate has f allen closer to pre- pandemic levels. The latest indicators suggest growth will continue in the short run but at rates lower than expected in the June 2024 Eurosystem staff macroeconomic projections. Real disposable income should continue to increase, supported by robust wage growth. This, together with gradually increasing confidence, would underpin a consumption- driven recovery. However, the impulse f rom consumption is somewhat weaker than f oreseen in the June projections, with incoming data and recent surveys pointing to still subdued consumer conf idence and elevated household saving intentions. Recent data on business investment also suggest weaker growth momentum. Domestic demand will nevertheless be supported by past monetary policy tightening ef f ects wearing off and an assumed continued easing of financing conditions, in line with market expectations of the future path of interest rates. In addition, a projected rise in f oreign demand supports the outlook for euro area exports. The labour market is seen as remaining resilient, with the unemployment rate expected to stay at historically low levels. As some of the cyclical factors that have lowered productivity growth in the recent past unwind, productivity is expected to pick up over the projection horizon. Overall, annual average real GDP growth is expected to be 0.8% in 2024 and to reach 1.3% in 2025 and 1.5% in 2026. Compared with the June 2024 Eurosystem staff macroeconomic projections, the outlook for GDP growth has been revised marginally down f or each year of the projection horizon. Fiscal and structural policies should be aimed at making the economy more productive and competitive, which would help to raise potential growth and reduce price pressures in the medium term. Mario Draghi s report on the future of European competitiveness and Enrico Letta s report on empowering the Single Market stress the urgent need f or ref orm and provide concrete proposals to make this happen. Implementing the EU s revised economic governance framework fully, transparently and without delay will help governments bring down budget def icits and debt ratios on a sustained basis. Governments should now make a strong start in this direction in their medium-term plans f or f iscal and structural policies. ECB Economic Bulletin, Issue 6 / 2024   Economic, financial and monetary developments Overview 4 4 Inflation According to Eurostat s flash estimate, annual inflation dropped to 2.2% in August, f rom 2.6% in July. Energy prices fell at an annual rate of 3.0%, af ter an increase of 1.2% in the previous month. Food price inflation went up slightly, to 2.4% in August. Goods inflation and services inflation moved in opposite directions. Goods inf lation declined to 0.4%, from 0.7% in July, while services inflation rose, to 4.2% from 4.0%. Most measures of underlying inf lation were broadly unchanged in July. Domestic inf lation edged down only slightly, to 4.4% f rom 4.5% in June, with strong price pressures coming especially from wages. Negotiated wage growth will remain high and volatile over the remainder of the year, given the signif icant role of one-of f payments in some countries and the staggered nature of wage adjus tments. At the same time, the overall growth in labour costs is moderating. The growth in compensation per employee f ell f urther to 4.3% in the second quarter, the f ourth consecutive decline, and ECB staf f project it to slow markedly again next year. Despite weak productivity, unit labour costs grew less strongly in the second quarter, by 4.6%, after 5.2% in the first quarter. ECB staff expect unit labour cost growth to continue declining over the projection horizon owing to lower wage growth and a recovery in productivity. Finally, prof its are continuing to partially of f set the inf lationary ef f ects of higher labour costs. The disinf lation process should be supported by receding labour cost pressures and the past monetary policy tightening gradually f eeding through to consumer prices. Most measures of longer-term inf lation expectations stand at around 2%, and the market-based measures have f allen closer to that level since the Governing Council s meeting on 18 July 2024. Following its recent moderation, headline inflation is projected to increase somewhat in the last quarter of this year, before declining f urther to the inf lation target by the end of 2025. The expected increase in the near term largely ref lects energy base ef f ects. Over the medium term, energy inf lation should settle at low positive rates given market expectations for energy commodity and wholesale