to the growth slowdown. what appears to be delaying the pass - through today is the fact that firms are absorbing labour cost increases by squeezing profit margins. this reflects two cyclical factors. first, the euro area is coming out of a prolonged period of low inflation, which historically leads to 3 / 6 bis central bankers'speeches a slower pass - through. 12 one reason is that price dispersion is narrower when inflation is low, implying that if an individual firm were to raise its prices, it would attract the attention of consumers and lose market share. firms are therefore more reluctant to pass on cost increases to consumers. 13 the second factor is the softening of activity in 2018. labour costs are typically passed on more strongly to prices when demand is stronger, 14 so the fact that the euro area has recently experienced a negative demand shock is likely to have held firms back from raising prices. the delay in pass - through may also be explained by an additional factor, which is lower imported inflation over the last two years. this has been reflected, since late summer 2017, in a growing discrepancy between the growth of the gdp deflator and core inflation. the gdp deflator has followed a more pronounced upward trend, rising from 0. 6 % at the end of 2016 to 1. 5 % at the end of 2018. one development that may have contributed to lower imported inflation was the appreciation of the euro exchange rate by around 8 % in nominal effective terms over the last two years. ecb internal analysis suggests that this had an impact on non - energy industrial goods inflation in 2018, especially for durable goods. 15 the upshot is that the pass - through of wages to prices is likely to be moderate until these various factors have played out. but there are several reasons to believe that they will unwind over the medium term. our monetary policy will remain accommodative and will respond to any changes in the inflation outlook. the effects of exchange rate appreciation have now reversed. demand should recover, so long as the downside risks to our outlook do not materialise. and with stronger demand, firms should be able to rebuild margins. moreover, even if the economy were to slow more than expected, the risks to wage growth may be contained. since the end of 2017, wage growth has been driven less by wage drift16 and more by negotiated wages, which are more persistent and react more slowly to cyclical labour market conditions. negotiated wages for 2019 have to a

last year. higher uncertainty may have played a role, as reflected in the rise in the household saving rate over the course of 2018. but the main drivers were idiosyncratic factors unrelated to the global economy, coupled with country - specific factors in france and italy. the most important issue for the consumption outlook is the labour market, since higher employment has been the major driver of consumption during the current expansion. so far the labour market has been resilient to the growth slowdown. while employment growth moderated in the second half of last year, in 2018 it was significantly higher than would be expected based on the static long - term relationship between employment and gdp growth. 7 as a result, real disposable income has remained resilient and households ’ assessment of their own financial situation, which is a good leading indicator of consumption, remains positive. the resilience of the employment - consumption relationship helps explain why, even as the manufacturing outlook has worsened, services have remained relatively robust. services is the most labour - intensive sector and is associated closely with consumers ’ expenditure. 8 there are however lags between changes in gdp and in employment, and surveys on employment, while remaining in expansionary territory, have decelerated since the middle of last year. so should the growth slowdown turn into a more persistent phenomenon, employment and consumption are likely to be affected. all in all, the current data suggest that external demand has not yet spilled over significantly into domestic demand, but the risks have risen in the last months and uncertainty remains high. this is why our medium - term outlook remains that growth will gradually return to potential, but the risks remain tilted to the downside. that outlook is also being buttressed by the pre - emptive reaction of stabilisation policies. fiscal 2 / 6 bis central bankers'speeches policy in the euro area has become mildly expansionary, with the aggregate fiscal stance expected to be – 0. 4 % of gdp in 2019 after five years of being broadly neutral. 9 and our forward guidance on monetary policy has been effective, as shown by the continuing easing of financial conditions since last december. the outlook for wages and inflation the weakening growth picture has naturally affected the inflation outlook as well. our projections for headline inflation this year have been revised downwards and we now see inflation at 1. 6 % in 2021. slower growth will also lead to a more muted recovery in underlying inflation than we had previously expected. reflecting the weaker outlook, market - based measures