European Central Bank — Economic Bulletin (Europe, 2019)

Economic Bulletin Issue 3 / 2019 Contents Update on economic and monetary developments Summary 1 2 3 4 5 External environment Financial developments Economic activity Prices and costs Money and credit Boxes 1 2 3 4 What the maturing tech cycle signals for the global economy Emerging market currencies: the role of global risk, the US dollar and domestic forces Exploring the factors behind the 2018 widening in euro area corporate bond spreads The predictive power of real M1 for real economic activity in the euro area Articles 1 2 The economic implications of rising protectionism: a euro area and global perspective Fiscal rules in the euro area and lessons from other monetary unions Statistics 2 2 5 9 11 15 18 22 22 26 31 35 40 40 63 S1 ECB Economic Bulletin, Issue 3 / 2019   Contents 1 Update on economic and monetary developments Summary The information that has become available since the Governing Council s monetary policy meeting in March confirms slower growth momentum extending into the current year. While there are signs that some of the idiosyncratic domestic factors dampening growth are fading, global headwinds continue to weigh on euro area growth developments. The risks surrounding the euro area growth outlook remain tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets. At the same time, further employment gains and rising wages continue to underpin the resilience of the domestic economy and gradually rising inflation pressures. However, an ample degree of monetary accommodation remains necessary to safeguard favourable financing conditions and support the economic expansion, and thus to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus is being provided by the Governing Council s forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets and the new series of targeted longer-term refinancing operations (TLTROs). Survey indicators of global economic activity have weakened in the first quarter of 2019. In particular, global trade has continued to slow down amid the turning of the global industrial cycle and heightened trade tensions. Global inflation has subsided in the first months of this year, largely on account of a lower contribution from the energy component. Euro area government bond yields overall declined somewhat as global risk-free rates decreased and the EONIA forward curve shifted downwards. Developments in sovereign bond spreads exhibited some heterogeneity across the euro area. Equity prices rose amid lower risk-free rates and stable and low volatility. Accordingly, yield spreads on corporate bonds narrowed. In foreign exchange markets, the euro remained broadly unchanged in trade-weighted terms. Euro area real GDP rose by 0.2%, quarter on quarter, in the fourth quarter of 2018, following an increase of 0.1% in the third quarter. Incoming data continued to be weak, mainly on account of the slowdown in external demand, compounded by country and sector-specific factors. As the impact of these factors is turning out to be somewhat longer-lasting, the slower growth momentum is expected to extend into the current year. Looking ahead, the effect of these adverse factors is expected to unwind. The euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, and the ongoing   albeit somewhat slower   expansion in global activity. ECB Economic Bulletin, Issue 3 / 2019   Update on economic and monetary developments Summary 2 According to Eurostat s flash estimate, euro area annual HICP inflation was 1.4% in March 2019, after 1.5% in February 2019, reflecting mainly a decline in food, services and non-energy industrial goods price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months. Measures of underlying inflation have remained generally muted, but labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase gradually over the medium term, supported by the ECB s monetary policy measures, the ongoing economic expansion and rising wage growth. Regarding monetary developments, broad money (M3) growth increased to 4.3% in February 2019, from 3.8% in January. M3 growth continues to be backed by bank credit creation and the narrow monetary aggregate M1 remained the main contributor to broad money growth. The annual growth rate of loans to non-financial corporations rebounded to 3.7% in February 2019 and has moderated in recent months, reflecting the typical lagged reaction to the slowdown in economic growth. The annual growth rate of loans to households remained broadly unchanged at 3.3% in February. The euro area bank lending survey for the first quarter of 2019 suggests that overall bank lending conditions remained favourable. Combining the outcome of the economic analysis with the signals coming from the monetary analysis, the Governing Council concluded that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. On the basis of this assessment, the Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. The Governing Council confirmed that the Eurosystem will continue to reinvest, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. The Governing Council reiterated its readiness to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council s inflation aim in a sustained manner. The precise terms of the new TLTRO series will be communicated at one of the Governing Council s forthcoming meetings. In particular, the pricing of the new TLTRO-III operations will take into account a thorough assessment of the bank-based transmission channel of monetary policy, as well as further developments in the economic outlook. In the context of the ECB s regular assessment, the Governing Council will also consider whether the preservation of the favourable implications of ECB Economic Bulletin, Issue 3 / 2019   Update on economic and monetary developments Summary 3 negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation. ECB Economic Bulletin, Issue 3 / 2019   Update on economic and monetary developments Summary 4 1 External environment Global survey indicators point to some deceleration in global activity in the first quarter of 2019. The global composite output Purchasing Managers  Index (PMI) excluding the euro area rose in March (see Chart 1), as an increase in the services sector more than offset a marginal decline in manufacturing. In quarterly terms, however, the PMI in the first quarter of 2019 is below the level recorded in 2017 and the first half of 2018, consistent with some deceleration in the global growth momentum. Across advanced economies, the US Markit PMI was broadly unchanged while the all-industry survey indicator published by the Institute for Supply Management (ISM) declined from rather high levels during the first quarter. PMIs also decreased in the United Kingdom and Japan, on the back of weaker readings in March. In emerging market economies, the quarterly PMI picked up strongly in Brazil, while decreasing in India and Russia. The PMI remained unchanged in China in the first quarter, although it recorded a strong increase in March. Chart 1 Global composite output PMI (diffusion index) Global composite output excluding the euro area Global composite output excluding the euro area   long-term average Advanced economies excluding the euro area Emerging market economies 58 56 54 52 50 48 2012 2013 2014 2015 2016 2017 2018 2019 Sources: Haver Analytics, Markit and ECB staff calculations. Notes: The latest observations are for March 2019.  Long-term average  refers to the period from January 1999 to March 2019. Global trade indicators signal a continued weakness at the start of the year. The volume of merchandise imports decreased by 1.9% in January 2019, in three-month-on-three-month terms, particularly on account of sharp declines in Asian countries. This decrease is partly related to the significant volatility of Chinese trade data around the Lunar New Year, which makes it difficult to interpret the January data. At the same time, the PMI new export orders remained below the expansionary threshold in March (see Chart 2). A broader measure, based on a principal component of leading indicators of global trade, qualifies this picture and points to a marginal increase in world trade in the first quarter of 2019, following subdued developments in the second half of last year. The ongoing slowdown in world trade is partly driven by the turning of the global industrial