under way and real disposable income growth is expected to benefit from lower rates of inflation. second, financing conditions are favourable. we also expect the stronger international environment to play an important role in stimulating euro area exports, and both domestic and external factors should foster investment. finally, the positive outlook for the euro area economy is very much supported by sound fundamentals and the absence of major imbalances. turning to price developments, let me first recall that, over recent months, annual rates of consumer price inflation have been affected by several factors of a special or temporary nature. this volatile pattern was broadly anticipated. however, annual inflation rates are currently somewhat higher than was expected a few months ago, with early estimates for march pointing to a figure of 2. 5 %. this is mainly because oil prices have again risen significantly in the more recent period. if sustained, higher oil prices would also have an impact on inflation rates in the remainder of 2002. while inflation rates are expected to fall to below 2 % later in the coming months, this decline may possibly be less pronounced than was foreseen, and inflation rates during this year could turn out to be somewhat higher than previously expected. beyond the shorter term, upward pressure on prices from aggregate demand should, in the light of current projections of a gradual economic recovery in the euro area, remain contained. in addition, the outlook for inflation is fundamentally dependent on wage moderation. such moderation is important not only in order to contain risks to price stability but also to foster employment growth. as i have already noted on earlier occasions, there is some cause for concern with regard to ongoing wage negotiations. fiscal policies in the euro area can also contribute to the maintenance of a favourable outlook for non - inflationary growth. it is vital that the commitments made to achieving balanced budgets by 200304 be firmly followed up in the member states concerned. a continuation along the path of fiscal consolidation is essential, as is vigilance in ensuring strict adherence to the medium - term plans and rigorous implementation of the procedures of the stability and growth pact. equally, the expected recovery should be seen as an ideal opportunity to strengthen efforts towards implementing comprehensive structural reforms a€ “ in public expenditure and revenues and product, labour and financial markets. heads of state and government confirmed this objective during their recent meeting in barcelona. if implemented vigorously, such reforms could increase the growth of real gdp and employment on a sustainable basis. past improvements in the functioning of markets, together with wage mode

the latest ecb staff macroeconomic projections. real gdp growth is now projected to be 1. 1 percent in 2019, 1. 2 percent in 2020 and 1. 4 percent in 2021. compared with the june eurosystem staff projections, growth for this year was revised down by 0. 1 percentage points, and for next year by 0. 2 percentage points. notwithstanding the downward revisions to the growth outlook, the balance of risks remains tilted to the downside. furthermore, i would characterise the distribution of risks as bimodal. in one scenario, global trade tensions and brexit could be resolved positively, while in another scenario, trade - related uncertainty could linger and risks associated with a disorderly brexit could materialise. chart 8 hicp and hicp excluding food and energy ( percentages per annum ) sources : eurostat and ecb calculations. notes : hicp stands for harmonised index of consumer prices. based on monthly observations. latest observation : august 2019 ( flash estimate ). turning to nominal developments, inflation continues to fall short of expectations ( chart 8 ). headline inflation remains well below our inflation aim, while core inflation has been hovering around 1 percent for an extended period of time. at one level, the reduction in labour market slack is translating into higher compensation per employee ( chart 9 ). however, the pass - through of higher wages to domestic price pressures remains muted, it follows that firms are absorbing higher unit labour costs through lower profit margins ( chart 10 ). while the reasons for this limited pass - through have yet to be fully explained, a contributing factor is the weakness in the manufacturing sector, as reflected by weaker supply chain price pressures compared with the services sector. the european commission ’ s indicators of three - months - ahead selling price expectations show that they have deteriorated in the manufacturing sector but have held up well in the services sector ( chart 11 ). https : / / www. ecb. europa. eu / press / key / date / 2019 / html / ecb. sp190916 ~ ca7... 16. 09. 2019 reflections on monetary policy page 8 of 18 chart 9 phillips curve - based decomposition of wage growth into its main drivers ( deviations from mean in year - on - year growth terms and percentage point contributions ) source : nickel, c. et al. ( eds. ) ( 2019 ) “ understanding low wage growth in the euro area and european countries ”, occasional paper series, no 232,