European Central Bank — Economic Bulletin (Europe, 2019)

Economic Bulletin Issue 6 / 2019 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 6 The September policy package Liquidity conditions and monetary policy operations in the period from 17 April to 30 July 2019 Domestic versus foreign factors behind the fall in euro area industrial production How does the current employment expansion in the euro area compare with historical patterns? Household income risk over the business cycle How do profits shape domestic price pressures in the euro area? Articles 1 2 Statistics Derivatives transactions data and their use in central bank analysis The taxonomy of ECB instruments available for banking supervision 2 2 6 14 19 24 29 37 40 40 44 50 53 58 65 69 69 85 S1 ECB Economic Bulletin, Issue 6 / 2019   Contents 1 Economic and monetary developments Overview Based on a thorough assessment of the economic and inflation outlook for the euro area, also taking into account the latest staff macroeconomic projections, the Governing Council took a number of decisions at its monetary policy meeting on 12 September in pursuit of its price stability objective. Incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures. This is reflected in the September staff projections, which show a further downgrade of the inflation outlook. At the same time, robust employment growth and increasing wages continue to underpin the resilience of the euro area economy. Against this overall backdrop, the Governing Council announced a comprehensive package of monetary policy measures in response to the continued shortfall of inflation with respect to its aim (see Box 1). Economic and monetary assessment at the time of the Governing Council meeting of 12 September 2019 Global growth softened in the first half of 2019, reflecting decelerating economic activity in both advanced and emerging economies. This is in line with survey-based indicators which point to subdued global activity. Global growth is projected to decline this year amid weak global manufacturing activity on the back of declining global investment and rising policy and political uncertainty on account of Brexit and the renewed intensification of trade tensions between the United States and China. Looking ahead, global growth is projected to gradually recover over the medium term but to remain below its long-term average. Global trade is expected to further weaken significantly this year but to recover in the medium term, while remaining more subdued than economic activity. Global inflationary pressures are expected to remain contained, while downside risks to global economic activity have intensified. Global long-term risk-free rates have declined since the Governing Council meeting in June 2019 amid market expectations of further accommodative monetary policy and a resurgence of global trade uncertainty. This decline in risk-free rates has supported the prices of euro area equities and corporate bonds. Meanwhile, corporate earnings expectations have fallen somewhat in response to persistent doubts about the global macroeconomic outlook. The EONIA forward curve also shifted downwards. In foreign exchange markets, the euro remained broadly unchanged in trade-weighted terms. Euro area real GDP increased by 0.2%, quarter on quarter, in the second quarter of 2019, following a rise of 0.4% in the previous quarter. Incoming economic data and survey information continue to point to moderate but positive growth in the third ECB Economic Bulletin, Issue 6 / 2019   Economic and monetary developments Overview 2 quarter of this year. This slowdown in growth mainly reflects the prevailing weakness of international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector. At the same time, the services and construction sectors are showing ongoing resilience and the euro area expansion is also supported by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the ongoing   albeit somewhat slower   growth in global activity. This assessment is broadly reflected in the September 2019 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021. Compared with the June 2019 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down for 2019 and 2020. The risks surrounding the euro area growth outlook remain tilted to the downside. These risks mainly pertain to the prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets. According to Eurostat s flash estimate, euro area annual HICP inflation was 1.0% in August 2019, which is unchanged from July. Lower energy inflation was offset by higher food inflation, while the rate of HICP inflation excluding food and energy was unchanged. On the basis of current futures prices for oil, headline inflation is likely to decline before rising again towards the end of the year. Measures of underlying inflation remained generally muted and indicators of inflation expectations stand at low levels. While labour cost pressures strengthened and broadened amid high levels of capacity utilisation and tightening labour markets, their pass-through to inflation is taking longer than previously anticipated. Over the medium term, underlying inflation is expected to increase, supported by the ECB s monetary policy measures, the ongoing economic expansion and robust wage growth. This assessment is also broadly reflected in the September 2019 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.0% in 2020 and 1.5% in 2021. Compared with the June 2019 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down over the whole projection horizon, reflecting lower energy prices and the weaker growth environment. Annual HICP inflation excluding energy and food is expected to be 1.1% in 2019, 1.2% in 2020 and 1.5% in 2021. The annual growth of broad money increased markedly in July 2019, while loans to the private sector remained broadly unchanged. Broad money (M3) growth increased to 5.2% in July 2019, after 4.5% in June. Sustained rates of broad money growth reflect ongoing bank credit creation for the private sector and low opportunity costs of holding M3. Furthermore, M3 growth remained resilient in the face of the fading out of the mechanical contribution of the net purchases under the asset purchase programme (APP) and weakening economic momentum. At the same time, favourable bank funding and lending conditions continued to support loan flows and thereby economic growth. The annual growth rate of loans to non-financial corporations remained unchanged at 3.9% in July 2019. The monetary policy measures decided by the Governing Council, including the more accommodative terms of the new series of quarterly targeted longer-term refinancing operations ECB Economic Bulletin, Issue 6 / 2019   Economic and monetary developments Overview 3 (TLTRO III), will help to safeguard favourable bank lending conditions and will continue to support access to financing, in particular for small and medium-sized enterprises. The aggregate fiscal stance for the euro area is projected to be mildly expansionary, providing some support to economic activity. In the next two years, the stance will continue to be mildly expansionary, mainly on account of further cuts in direct taxes and social security contributions in most of the larger euro area countries. In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies that will create the conditions for automatic stabilisers to operate freely. Monetary policy decisions Based on the regular economic and monetary analyses, the Governing Council made the following decisions:         First, the interest rate on the deposit facility was decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility were kept unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. Second, net purchases will be restarted under the APP at a monthly pace of  20 billion as from 1 November. The Governing Council expects the APP to run for as long as necessary to reinforce the accommodative impact of the ECB s policy rates, and to end shortly before it starts raising the key ECB interest rates. Third, reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, 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.