European Central Bank — Economic Bulletin (Europe, 2015)

Economic Bulletin Issue 4 / 2015 30 53%100%3,5E7,5E6EEEE80 6E6EE   European Central Bank, 2015 Postal address 60640 Frankfurt am Main Germany Telephone +49 69 1344 0 Website www.ecb.europa.eu This Bulletin was produced under the responsibility of the Executive Board of the ECB. Translations are prepared and published by the national central banks. All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The cut-off date for the statistics included in this issue was 2 June 2015. ISSN 2363-3417 (epub) ISSN 2363-3417 (online) EU catalogue number QB-BP-15-004-EN-E (epub) EU catalogue number QB-BP-15-004-EN-N (online) contEnts Economic and monEtary dEvElopmEnts Overview 1 External environment 2 Financial developments 3 Economic activity 4 Prices and costs 5 Money and credit 6 Fiscal developments BoxEs Box 1 The rise to prominence of India s economy Box 2 Recent equity price developments in the euro area and the United States Box 3 Box 4 Liquidity conditions and monetary policy operations in the period from 28 January 2015 to 21 April 2015 Recent current account developments in euro area countries with large pre-crisis deficits Box 5 Monitoring the exchange rate pass-through to HICP inflation Box 6 Non-bank financing for euro area NFCs during the crisis Box 7 The 2015 Ageing Report: how costly will ageing in Europe be? Box 8 The effectiveness of the medium-term budgetary objective as an anchor of fiscal policies articlEs The role of the central bank balance sheet in monetary policy IMF surveillance of the euro area and its member countries Forecasting the price of oil statistics 5 7 1 1 1 5 2 1 2 4 2 9 3 1 3 4 3 9 4 3 4 6 4 9 5 2 5 7 6 1 7 8 8 7 s1 ECB Economic Bulletin Issue 4 / 2015 3 E c o n o m i c a n d m o nEt a r y dEvEl o p mEn t s ovErviEw The Governing Council is maintaining a steady monetary policy course, firmly implementing all its monetary policy decisions. Purchases under the expanded asset purchase programme (APP)   of  60 billion per month   are intended to run until the end of September 2016 and, in any case, until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term. When carrying out its assessment, the Governing Council will follow its monetary policy strategy and concentrate on trends in inflation, looking through fluctuations in measured inflation in either direction if judged to be transient and to have no implication for the medium-term outlook for price stability. The asset purchase programmes are proceeding well and positive effects are visible. The monetary policy measures have contributed to a broad-based easing in financial conditions, which remain very accommodative. Inflation expectations have recovered from their low mid-January levels, and borrowing conditions for households and firms have continued to evolve favourably. The effects of these measures are working their way through to the economy and will contribute further to an improvement in the economic outlook. In an environment of very low interest rates, money and loan growth have continued to recover. Partly as a result of the expanded APP, monetary indicators have further strengthened and credit dynamics   while remaining subdued   have continued to improve. In April the decline in loans to non-financial corporations continued to moderate and the growth of loans to households increased slightly. These developments have been supported by a significant decrease in bank lending rates in much of the euro area since summer 2014, as well as by signs of an improvement in both the supply of and demand for bank loans. Overall, recent developments confirm that the ECB s monetary policy measures are helping to restore the proper functioning of the monetary policy transmission mechanism and easing bank lending conditions. Indeed, the April 2015 euro area bank lending survey shows that more relaxed lending conditions continue to support a further recovery in loan growth, in particular for enterprises. Moreover, increased competition between banks contributed to an easing of credit conditions in the first quarter of 2015, in tandem with a pick-up in business loan demand. In addition, as confirmed by the survey on the access to finance of enterprises in the euro area (SAFE), the improvement in credit market conditions applies not only to large firms but also to small and medium-sized enterprises (SMEs). A number of factors are supporting the gradual recovery in euro area economic activity and the labour market. Real GDP increased by 0.4%, quarter on quarter, in the first quarter of 2015, after growing by 0.3% in the fourth quarter of 2014. The data indicate that the economic recovery has broadened, which can be attributed to several factors. ECB monetary policy measures are contributing to a substantial easing of broad financial conditions and facilitating access to credit, for SMEs as well as for larger firms. The progress made with fiscal consolidation and structural reforms has had a favourable effect on economic growth. Moreover, low oil prices are bolstering real disposable income and corporate profitability, supporting private consumption and investment, while the weakening of the euro s exchange rate has helped exports. In line with the broadening of the recovery, the euro area labour market has continued to improve somewhat, as reflected in gradually declining unemployment. However, unemployment is still high in the euro area as a whole as well as in many individual countries. Looking ahead, the recovery is expected to broaden further. Private consumption has been the main factor behind the improvement in growth so far and should continue to benefit from increasing wage growth due to rising employment and from the positive impact of the fall in energy prices on real disposable income. In 2015, moreover, business investment is expected to become a more ECB Economic Bulletin Issue 4 / 2015 5 important driver of the recovery, supported by strengthening domestic and external demand, the need to modernise and rebuild ageing capital stock, the accommodative monetary policy stance and stronger gross operating surpluses. In addition, export growth should benefit from the expected strengthening of the global economic recovery. At the same time, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms is likely to dampen the pick-up in activity. The June 2015 Eurosystem staff macroeconomic projections for the euro area1 foresee annual real GDP increasing by 1.5% in 2015, 1.9% in 2016 and 2.0% in 2017. Compared with the March 2015 ECB staff macroeconomic projections, the projections for real GDP growth remain virtually unchanged over the projection horizon. In the Governing Council s assessment, risks to the outlook for economic activity   while remaining on the downside   have become more balanced on account of its monetary policy decisions and oil price and exchange rate developments. Headline inflation appears to have bottomed out at the beginning of this year, as the downward effects of past energy price declines have receded. According to Eurostat s flash estimate, annual HICP inflation was 0.3% in May 2015, up from 0.0% in April and a low of -0.6% in January. This pick-up stems essentially from a less negative contribution from the energy component, which in turn mainly reflects some recovery in oil prices in US dollars amplified by a further depreciation of the euro. Inflation rates are projected to rise later this year and to increase further in 2016 and 2017. Towards the end of this year, the rate of change in the energy component is envisaged to be pushed up by base effects linked to the fall in oil prices in late 2014. In addition, the weaker exchange rate of the euro will exert upward pressure on inflation. Domestic price pressures should also strengthen on account of the expected closing of the output gap leading to higher wage growth and increased profit margins. The June 2015 Eurosystem staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.3% in 2015, 1.5% in 2016 and 1.8% in 2017. In comparison with the March 2015 ECB staff macroeconomic projections, the inflation projections have been revised upwards for 2015 and remain unchanged for 2016 and 2017. The projections are conditional on the full implementation of the ECB s monetary policy measures. The Governing Council will continue to monitor closely the risks to the outlook for price developments over the medium term. In this context, it will focus in particular on the pass-through of its monetary policy measures, as well as on geopolitical, exchange rate and energy price developments. Based on its regular economic and monetary analyses, and in line with its forward guidance, the Governing Council decided at its meeting on 3 June 2015 to keep the key ECB interest rates unchanged. In the Governing Council s assessment there is a need to maintain a steady monetary policy course. The full implementation of all monetary policy measures will provide the necessary support to the euro area economy and lead to a sustained return of inflation rates towards levels below, but close to, 2% in the medium term. 1 See the article entitled  June 2015 Eurosystem staff macroeconomic projections for the euro area , published on the ECB s