European Central Bank — Economic Bulletin (Europe, 2018)

Economic Bulletin Issue 5 / 2018 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 6 Imbalances in China: is growth in peril from a housing market downturn? Cyclical developments in the euro area current account Growth synchronisation in euro area countries The role of wages in the pick-up of inflation Developments in mortgage loan origination in the euro area Country-specific recommendations for economic policies under the 2018 European Semester Articles 1 2 3 The evolution of the ECB s accountability practices during the crisis Measuring fragmentation in the euro area unsecured overnight interbank money market: a monetary policy transmission approach Private consumption and its drivers in the current economic expansion Statistics ECB Economic Bulletin, Issue 5 / 2018   Contents 2 2 4 8 10 14 17 21 21 25 30 34 38 41 47 47 72 86 S1 1 Update on economic and monetary developments Summary The information that has become available since the Governing Council s monetary policy meeting on 14 June indicates that the euro area economy is proceeding along a solid and broad-based growth path. 1 Uncertainties related to global factors, notably the threat of protectionism, remain prominent, and the risk of persistent heightened financial market volatility continues to warrant monitoring. However, the risks surrounding the euro area growth outlook can still be assessed as broadly balanced. The underlying strength of the economy has confirmed the Governing Council s confidence that the sustained convergence of inflation to its aim will continue in the period ahead and will be maintained even after a gradual winding-down of the net asset purchases. Nevertheless, significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by the Governing Council s enhanced forward guidance on the key ECB interest rates. In any event, the Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards its aim in a sustained manner. The growth momentum of the global economy continued to be steady in the second quarter of 2018, but downside risks related to trade tariffs have remained prominent. In addition, global trade indicators recorded a loss in momentum. Financial conditions have tightened somewhat for emerging market economies, but overall remain supportive in advanced economies. In the euro area, sovereign bond yields have declined since the 14 June meeting, on the back of receding volatility in sovereign debt markets and declining risk-free rates. Equity prices experienced a correction amid increasing trade tensions. In foreign exchange markets, the euro broadly appreciated in trade-weighted terms. The latest economic indicators have stabilised and continue to point to ongoing solid and broad-based growth, albeit at a slower pace than in 2017. This easing reflects a pull-back from the very high levels of growth last year and is related mainly to weaker impetus from previously very strong external trade, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level. Private consumption continues to be supported by ongoing employment gains, which, in turn, partly reflect past labour market reforms, and by growing household wealth. Business investment is fostered by the favourable financing conditions, rising corporate profitability and solid demand. Housing 1 Taking into account information available at the time of the Governing Council meeting of 26 July 2018. ECB Economic Bulletin, Issue 5 / 2018   Update on economic and monetary developments Summary 2 investment remains robust. In addition, the broad-based expansion in global demand is expected to continue, thus providing impetus to euro area exports. Euro area annual HICP inflation increased to 2.0% in June, from 1.9% in May, reflecting mainly higher energy and food price inflation. On the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around the current level for the remainder of the year. While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Domestic cost pressures are strengthening and broadening amid high levels of capacity utilisation and tightening labour markets. Uncertainty around the inflation outlook is receding. Looking ahead, underlying inflation is expected to pick up towards the end of the year and thereafter to increase 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. The monetary analysis indicates that broad money growth increased again in June 2018, having gradually decelerated since it last peaked in September 2017. The recovery in the growth of loans to the private sector is proceeding, driven mainly by loans to non-financial corporations (NFCs). The euro area bank lending survey for the second quarter of 2018 suggests that loan growth continued to be supported by easing credit standards and increasing demand across all loan categories. Net issuance of debt securities by euro area NFCs is estimated to have increased further, while financing costs for NFCs have remained favourable. On the basis of the outcome of the economic analysis and the signals coming from the monetary analysis, the Governing Council confirmed 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. Accordingly, 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 summer 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. Regarding non-standard monetary policy measures, the Governing Council confirmed that the Eurosystem will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of  30 billion until the end of September 2018. The Governing Council anticipates that, after September, subject to incoming data confirming its medium-term inflation outlook, it will reduce the monthly pace of the net asset purchases to  15 billion until the end of December 2018 and then end net purchases. Furthermore, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. ECB Economic Bulletin, Issue 5 / 2018   Update on economic and monetary developments Summary 3 1 External environment Global survey indicators continue to signal a steady growth momentum for the second quarter of 2018. The global composite output Purchasing Managers  Index (PMI) excluding the euro area increased slightly further in June (see Chart 1), reaching a four-month high, as the continued pick-up in the services sector more than compensated for the moderate decline in manufacturing. In quarterly terms, the PMI in the second quarter of 2018 was slightly above the average in the previous quarter. The composite output PMI in June decreased moderately in the United States from May, while it strengthened in Japan and in the United Kingdom. In emerging market economies, the composite output PMI increased in June in China and bounced back considerably in India, while the rate of expansion slowed in Russia and Brazil. Chart 1 Global composite output PMI (diffusion index) Global excluding euro area Global excluding euro area   long-term average Advanced economies excluding euro area Emerging market economies 60 58 56 54 52 50 48 2011 2012 2013 2014 2015 2016 2017 2018 Sources: Haver Analytics, Markit and ECB calculations. Notes: The latest observations are for June 2018.  Long-term average  refers to the period from January 1999 to June 2018. At the same time downside risks to the global economy have intensified, amid actions and threats regarding trade tariff increases by the United States and possible retaliation by the affected countries. The first wave of US tariffs on Chinese imports took effect on 6 July and further US tariffs are planned. The Chinese authorities revealed their intention to introduce retaliatory measures. Simultaneously, retaliatory measures by the European Union and Canada against the tariffs previously imposed on steel and aluminium came into force. The US administration also initiated a new investigation into imports of cars and spare parts for cars, which, should it result in protectionist measures, could particularly affect Canada, Japan, Mexico and South Korea as well as key economies in the European Union. Complex supply chains could furthe