European Central Bank — Economic Bulletin (Europe, 2017)

Economic Bulletin Issue 3 / 2017 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 5 The ECB s asset purchase programme and TARGET balances: monetary policy implementation and beyond Recent developments in youth unemployment Assessing labour market slack What can recent developments in producer prices tell us about pipeline pressures? The targeted longer-term refinancing operations: an overview of the take-up and their impact on bank intermediation Articles 1 2 The slowdown in euro area productivity in a global context Harmonised statistics on payment services in the Single Euro Payments Area Statistics 2 2 4 8 11 15 17 21 21 27 31 36 42 47 47 68 S1 ECB Economic Bulletin, Issue 3 / 2017 1 Update on economic and monetary developments Summary The ECB s monetary policy measures have continued to preserve the very favourable financing conditions that are necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. Incoming data since the Governing Council s meeting in early March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished.1 At the same time, underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend. Moreover, the ongoing volatility in headline inflation underlines the need to look through transient developments in HICP inflation, which have no implication for the medium-term outlook for price stability. Available indicators point to sustained global growth at the beginning of 2017, while the recovery in international trade has continued. The global recovery is broadening, with the improvement in growth being widespread across countries. International financial conditions have remained overall supportive, despite significant policy uncertainty. Global headline inflation has increased further, mainly driven by energy prices. However, oil prices have recently undergone some volatility. Euro area financing conditions remain very favourable. Comparing developments between the Governing Council meetings of 9 March and 27 April, bond, equity and foreign exchange markets overall show only small movements. Incoming data, notably survey results, suggest that the ongoing economic expansion will continue to firm and broaden. The pass-through of the monetary policy measures is supporting domestic demand and facilitates the ongoing deleveraging process. The recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Employment gains, which are also benefiting from past labour market reforms, are supporting real disposable income and private consumption. Moreover, the signs of a stronger global recovery and increasing global trade suggest that foreign demand should increasingly add to the overall resilience of the economic expansion in the euro area. However, economic growth continues to be dampened by a sluggish pace of implementation of structural reforms, in particular in product markets, and by remaining balance sheet adjustment needs in a number of sectors. The risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside and relate predominantly to global factors. 1 Taking into account information available at the time of the Governing Council meeting of 27 April 2017. ECB Economic Bulletin, Issue 3 / 2017   Update on economic and monetary developments Summary 2 Inflation has been recovering from the very low levels seen in 2016, largely owing to higher energy price increases. After reaching 2.0% in February, euro area annual HICP inflation declined to 1.5% in March 2017. Measures of underlying inflation, however, have remained low and are expected to show only a gradually rising trend over the medium term, supported by the monetary policy measures, the expected continuing economic recovery and the corresponding gradual absorption of slack. Broad money growth remained robust, while the recovery in loan growth to the private sector observed since the beginning of 2014 is proceeding. The euro area bank lending survey for the first quarter of 2017 indicates that net loan demand has increased and bank lending conditions have eased further across all loan categories. The pass-through of the monetary policy measures put in place since June 2014 thus continues to significantly support borrowing conditions for firms and households and credit flows across the euro area. Moreover, financing costs for euro area non- financial corporations are estimated to have remained favourable in the early months of 2017. At its meeting on 27 April 2017, based on the regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged. The Governing Council continues to expect the key ECB interest rates to remain at present or lower 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 confirmed that the net asset purchases, at the new monthly pace of  60 billion, are intended to run until the end of December 2017, 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. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. Looking ahead, the Governing Council confirmed that a very substantial degree of monetary accommodation is needed for euro area inflation pressures to build up and support headline inflation in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration. ECB Economic Bulletin, Issue 3 / 2017   Update on economic and monetary developments Summary 3 1 External environment Surveys point to sustained global growth in the first quarter of 2017. The global composite output Purchasing Managers  Index (PMI) excluding the euro area increased in March (see Chart 1), driven by a rise in the services index while the manufacturing PMI remained broadly unchanged at three-year highs. In quarterly terms, the PMI remained at about the same level in the first quarter of 2017 relative to the previous quarter, pointing to ongoing robust growth. Quarterly PMIs weakened in the United Kingdom and to a lesser extent in the United States, but picked up in Japan. Among emerging market economies (EMEs), quarterly PMIs decreased in China, but improved in Russia, India and Brazil   albeit remaining below the expansionary level. Chart 1 Global composite output PMI (diffusion index) global excluding euro area global excluding euro area   long-term average advanced economies excluding euro area EMEs 60 58 56 54 52 50 48 2011 2012 2013 2014 2015 2016 2017 Sources: Markit and ECB calculations. Note: The latest observations are for March 2017. The recovery is broadening, with the improvement in growth being widespread across countries. Indeed, the dispersion of quarterly growth rates across countries has narrowed considerably in recent quarters. In particular, activity in commodity exporters has stabilised following the rebound in commodity prices, while temporary downturns caused by domestic factors in countries such as Turkey are also bottoming out. Global financial conditions remain broadly supportive. Equity markets have moderated recently as investors had some concerns about the ability of the new US administration to follow through on policy pronouncements. Yet despite significant policy uncertainty, financial markets have been generally resilient, with risk aversion low. The Federal Reserve System increased its official interest rates at its March meeting. While other major central banks are expected to maintain an accommodative stance, markets have also been buoyed by expectations that monetary tightening in the United States will be gradual. In China, financial conditions have tightened for banks and bond yields have increased, but benchmark ECB Economic Bulletin, Issue 3 / 2017   Update on economic and monetary developments External environment 4 bank lending rates have remained unchanged. Financial conditions in most other EMEs have improved with financial markets rebounding and, following some weeks of outflows, capital has flowed back towards EMEs. The recovery in global trade continued at the start of the year. Growth in global goods imports increased to 2.8% (in three-month-on-three-month terms) in February, the strongest figure in more than ten years (see Chart 2). The rise in momentum was mainly driven by EMEs, with particularly strong improvements in central and eastern Europe and Latin America. Leading indicators also confirm the positive trend. The global PMI for new export orders increased to 52.5 in the first quarter of 2017, pointing to a sustained recovery in global trade growth. Chart 2 Global trade and surveys (in three-month-on-three-month percentage (left-hand scale); diffusion index (right-hand scale)) global merchandise imports (left-hand scale) global PMI new export orders (right-hand scale) global manufacturing PMI (right-hand