yves mersch : economic and monetary policy at a turning point – where is the economy heading in europe, the united states and china? speech by mr yves mersch, member of the executive board of the european central bank, at the petersberger sommerdialog, konigswinter, 29 june 2019. * * * despite the escalating trade dispute between the united states and china, the global economy continues to grow robustly, albeit at a slower pace. looking at developments in major economies beyond the euro area, activity in the united states is supported by the strong labour market, accommodative financial conditions and current fiscal stimulus. however, economic growth is expected to decelerate. at the same time, in china the slowdown in domestic demand has been cushioned by the implementation of a series of fiscal and monetary policy measures. although the escalation in the trade dispute with the united states is foreseen to weigh on trade, china is expected to continue its orderly transition to a more balanced growth path. the incoming data for the euro area in the first quarter of 2019 have been somewhat better than expected. euro area real gdp increased by 0. 4 % quarter on quarter in the first quarter of 2019, bolstered by resilient domestic demand. however, survey information and economic indicators point to somewhat weaker growth in the second and third quarters of this year. this reflects the ongoing weakness in global trade and the prolonged presence of uncertainties that continue to weigh on euro area growth, in particular in the manufacturing sector. consequently, the eurosystem staff projections see euro area real gdp growth of 1. 2 % in 2019, which will accelerate further, to 1. 4 %, in both 2020 and 2021. compared with the march 2019 staff projections, the outlook for real gdp growth has been revised up slightly for 2019, largely owing to a stronger than expected first quarter. at the same time, real gdp growth has been revised down for 2020 and 2021, mainly reflecting a somewhat weaker contribution of foreign demand. the fundamental factors supporting the euro area expansion remain broadly in place. labour market dynamics remain robust, with unemployment at 7. 6 % in april, the lowest level since august 2008. employment increased by 0. 3 % quarter on quarter in q1 2019, as in the previous quarter. the cumulative increase in the number of people employed between q2 2013, the trough of euro area employment, and q1 2019 amounts to 10. 8 million. nevertheless

dominant characteristic of the current expansion is low inflation and quiescent inflation expectations, which have helped create a financial environment conducive to strong capital spending and longer - range planning generally. i emphasized this point in our humphreyhawkins testimony of a year ago. since then, increases in hourly compensation as measured by the employment cost index have continued to fall far short of what they would have been had historical relationships between compensation gains and the degree of labor market tightness held. reaching some judgment about the reasons for this departure from past patterns is important. as i see it, heightened job insecurity explains a significant part of the restraint on compensation and the consequent muted price inflation. surveys of workers have highlighted this extraordinary state of affairs. in 1991, at the bottom of the recession, a survey of workers at large firms indicated that 25 percent feared being laid off. in 1996, despite the sharply lower unemployment rate and the demonstrably tighter labor market, the same survey organization found that 46 percent were fearful of a job layoff. the continued reluctance of workers to leave their jobs to seek other employment as the labor market has tightened provides further evidence of such concern, as does the tendency toward longer labor union contracts. for many decades, contracts rarely exceeded three years. today, one can point to five - and six - year contracts - - contracts that are commonly characterized by an emphasis on job security and that involve only modest wage increases. the low level of work stoppages of recent years also attests to concern about job security. thus, the willingness of workers to trade off smaller increases in wages for greater job security seems to be reasonably well - documented for this particular business - cycle expansion. the unanswered question is why this insecurity has persisted even as the labor market has, by all objective measures, tightened considerably. one possibility is the ongoing concern of workers about job skill obsolescence. the reality of this obsolescence is evidenced by the marked expansion of on - the - job training programs, especially in technical areas, in many of the nation ’ s corporations. no longer can one expect to obtain all of one ’ s lifetime job skills with a high - school or college diploma. indeed, continuing adult education is perceived to be increasingly necessary to retain a job. certainly, there are other possible explanations of the softness in compensation growth in the past few years. the sharp deceleration in health care costs, of course, is cited frequently. another possibility