European Central Bank — Economic Bulletin (Europe, 2017)

Economic Bulletin Issue 8 / 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 What is driving metal prices? Liquidity conditions and monetary policy operations in the period from 26 July to 31 October 2017 The recent strength of survey-based indicators: what does it tell us about the depth and breadth of real GDP growth? What can we learn from the ECB Survey of Professional Forecasters about perceptions of labour market dynamics in the euro area? An assessment of the review of draft budgetary plans based on the 2018 exercise Articles 1 2 The oil market in the age of shale oil The impact of global value chains on the macroeconomic analysis of the euro area Statistics 2 2 5 11 16 22 27 34 36 36 40 44 49 52 57 57 75 96 ECB Economic Bulletin, Issue 8 / 2017   Contents 1 Economic and monetary developments Overview At its monetary policy meeting on 14 December 2017, the Governing Council concluded that an ample degree of monetary accommodation is still needed to secure a return of inflation towards levels that are below, but close to, 2%. The information that has become available since the previous monetary policy meeting in late October, including the new Eurosystem staff projections, indicates a strong pace of economic expansion and a significant improvement in the growth outlook. The Governing Council assessed that the strong cyclical momentum and the significant reduction of economic slack give grounds for greater confidence that inflation will converge towards its aim. At the same time, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. The Governing Council therefore concluded that an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term. This continued monetary support is provided by the additional net asset purchases that the Governing Council decided on at the October monetary policy meeting, by the sizeable stock of acquired assets and the forthcoming reinvestments, and by the forward guidance on interest rates. Economic and monetary assessment at the time of the Governing Council meeting of 14 December 2017 The Governing Council s economic assessment reflected that the euro area economic expansion continues to be solid and broad-based across countries and sectors. Real GDP growth is supported by growth in private consumption and investment as well as exports benefiting from the broad-based global recovery. The latest survey results and incoming data confirm robust growth momentum. The global economy is also continuing to expand at a solid rate, and the recovery shows signs of synchronisation globally. Financing conditions in the euro area have remained very favourable. Euro area sovereign bond yields have declined slightly since 7 September. Corporate bond spreads have also fallen, while equity prices of euro area non-financial corporations (NFCs) have increased. At the same time, valuations of corporate bonds and equities have continued to be supported by the robust economic outlook. In foreign exchange markets, the euro has remained broadly unchanged in recent months. Looking ahead, the December 2017 Eurosystem staff macroeconomic projections for the euro area foresee annual real GDP increasing by 2.4% in 2017, 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020. Compared with the September 2017 ECB staff macroeconomic projections, the outlook for GDP growth ECB Economic Bulletin, Issue 8 / 2017   Economic and monetary developments Overview 2 has been revised upwards substantially. The ongoing economic expansion in the euro area is expected to continue to be supported by the ECB s monetary policy measures. Furthermore, private expenditure and consumption growth are supported by lower deleveraging needs and improved labour market conditions. Improvements in corporate profitability and the very favourable financing conditions continue to promote the recovery in business investment, while euro area exporters are benefiting from the ongoing global economic expansion. Euro area annual HICP inflation was 1.5% in November, up from 1.4% in October, according to Eurostat s flash estimate. At the same time, measures of underlying inflation have moderated somewhat recently, in part owing to special factors. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to moderate in the coming months, mainly reflecting base effects in energy prices, before increasing again. Underlying inflation is expected to rise gradually over the medium term, supported by the ECB s monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth. This assessment is also broadly reflected in the December 2017 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.5% in 2017, 1.4% in 2018, 1.5% in 2019 and 1.7% in 2020. Compared with the September 2017 ECB staff macroeconomic projections, the outlook for headline HICP inflation has been revised up, mainly reflecting higher oil and food prices. The latest staff projections also foresee the euro area budget deficit declining further over the projection horizon, 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. The euro area government debt-to-GDP ratio is expected to continue to decline, albeit from a still high level. Complementing the economic assessment, the monetary analysis showed that money growth remained robust in October and during the third quarter of 2017. Broad money continued to expand at 5% in October, in line with the steady pace witnessed since mid-2015. The recovery in loan growth to the private sector has also continued. The annual flow of total external financing to NFCs is estimated to have strengthened in the third quarter of 2017, reflecting improvements in both bank lending and debt securities issuance. Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council confirmed the need for an ample 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 continues to expect 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 ECB Economic Bulletin, Issue 8 / 2017   Economic and monetary developments Overview 3 confirmed its intention to continue to make net asset purchases under the asset purchase programme (APP), from January 2018 onwards at a monthly pace of  30 billion, until the end of September 2018, 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. Moreover, the Governing Council reconfirmed 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. The Governing Council also reiterated that the Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. ECB Economic Bulletin, Issue 8 / 2017   Economic and monetary developments Overview 4 1 External environment The global economy is continuing to expand at a solid rate, with increasing signs of synchronisation. The outlook among advanced economies entails robust expansion, which slows down over the projection horizon as the upturn matures. Among emerging market economies, the outlook is supported by strengthening activity in commodity exporters. Global trade indicators point to a rebound in the third quarter. Global inflation is expected to rise slowly as spare capacity at the global level diminishes. Global economic activity and trade The sustained pace of expansion of the global economy has become more broad-based and extended into the second half of the year. The recovery shows signs of synchronisation globally, as the share of countries with growth in economic activity above the average of recent years has been increasing since the second half of 2016. Across advanced economies, US economic activity expanded at a solid pace in the third quarter, in spite of the impact of the recent hurricanes. Real GDP growth in Japan also remained robust, while activity in the United Kingdom was relatively muted, partly on account of the negative effect of the depreciation of the pound on real household income and consumption, which more than offset the gains in competitiveness and the positive impetus from the increasingly robust expansion in the euro area. Across emerging economies, activity has been supported by India and China, as well as by the recoveries in Brazil and Russia after their deep recessions, although some loss of dynamism is anticipated in the short term in the latter. Survey-based indicators and sentiment surveys point to sustained global growth in the near term. The global composite output Purchasing Managers  Index (PMI), excluding the euro area, remained at similar