The year at a glance
In 2017, the economic recovery in the euro area developed into a solid and broad-based expansion. The economy grew by 2.5% and by the end of the year had recorded 18 straight quarters of growth. This represented the strongest expansion for a decade, and the broadest for two decades. The dispersion of growth rates among euro area countries fell to its lowest level since the start of Monetary Union.
Robust growth ensured that the recovery in the labour market continued apace. Employment rose by 1.6% to reach its highest level ever, buoyed by record participation rates for women and older people. Unemployment fell to its lowest level since January 2009. Overall, 7.5 million jobs have been created since mid-2013, offsetting the total number of jobs lost during the crisis.
As in previous years, the ECB’s monetary policy played a central role in this recovery and convergence story. In 2017, past asymmetries in the transmission of our monetary policy largely disappeared and financing conditions stabilised at record lows across the euro area. This contributed to the strongest increase in the growth of credit to the private sector since the crisis began in 2008.
The robust performance of the real economy, however, was not matched by developments in inflation. While headline inflation recovered from its past lows, averaging 1.5% over the year, domestic price pressures remained muted and underlying inflation lacked signs of a sustained upward trend.
The differing outlooks for growth and inflation shaped the ECB’s monetary policy decisions during the year, leading us to recalibrate our asset purchase programme.
In October, the Governing Council decided to further reduce the pace of asset purchases from €60 billion to €30 billion per month, but to extend the programme by at least nine months until September 2018. Additionally, in March 2018 the Governing Council removed from its official communication the explicit reference to its readiness to expand the asset purchase programme if the outlook became less favourable.
The Governing Council's decisions reflected its increased confidence in the outlook for the economy, in which context an unchanged policy stance would have become increasingly expansionary. But they also acknowledged that patience was needed for inflationary pressures to build up, and that persistence was necessary in our monetary policy for inflation dynamics to become durable and self-sustained.
Though monetary policy is having its intended effects, it can also produce side effects. The ECB therefore continued to closely monitor financial stability risks in 2017, which appeared to be contained.
Stronger nominal growth helped reduce risks by improving the debt sustainability of firms and households. Debt ratios in both sectors dropped to their early 2008 levels, indicating that the recovery has not come at the price of re-leveraging in the private sector. In fact, for virtually the first time since the start of Monetary Union, private spending has risen while private indebtedness has fallen.
For banks, too, the improving economy offered a window of opportunity to further strengthen their balance sheets. The stronger economy helped stabilise profitability through higher business volumes and lower impairment costs. Banks’ shock-absorbing capacity continued to rise, with Common Equity Tier 1 ratios reaching 14.5% in the third quarter of 2017, and asset quality improved.
Euro area banks accelerated their reduction of non-performing loans (NPLs), which decreased from 8% of total loans in 2014 to 5.2% in the third quarter of 2017. NPLs fell by €119 billion in the first three quarters of 2017 alone, with loan sales in secondary markets making up an increasing share of disposals. This was helped by ECB initiatives to improve transparency in NPL markets. However, further efforts to reduce high NPL stocks remain necessary.
The ECB also continued to monitor financial market conditions. Markets were relatively calm in 2017, but remained vulnerable to an abrupt repricing of risk and increases in financial market volatility. These risks materialised in global equity markets in early 2018, although to date without significant spillovers to euro area credit markets and hence broader financial conditions.
2017 saw important developments in the payments architecture of the euro area as well. The final wave of migration to TARGET2-Securities was completed, and the platform processed an average of 556,684 transactions per day thereafter. The new €50 banknote was launched, improving payment security for euro area citizens, for whom cash remains the primary means of payment at points of sale.
Finally, the ECB took a number of steps to improve its transparency and accountability towards EU citizens. We answered 138 questions from Members of the European Parliament in 2017. We opened our new Visitor Centre, which is expected to host 40,000 people a year. Our website had visitors from all over the world and was viewed over 17 million times.
Looking ahead, we expect the pace of economic expansion to remain strong in 2018. While we remain confident that inflation will converge towards our aim over the medium term, there are still uncertainties about the degree of slack in the economy.
A patient, persistent and prudent monetary policy therefore remains necessary to ensure that inflation will return to our objective.
Frankfurt am Main, April 2018
The year in figures
The ECB’s policies and activities in the economic and financial environment of 2017
The euro area’s economic recovery was supported by tailwinds and monetary policy
The economic expansion in the euro area that started in 2013 proceeded in 2017, while demonstrating resilience in the face of uncertainties. Output growth firmed and became broader based, with the dispersion of growth rates across both countries and sectors standing at its lowest level for two decades. Euro area labour markets continued to benefit from the ongoing recovery. Employment increased to the highest level since the establishment of the euro area, while the unemployment rate declined to a level last seen in the first quarter of 2009.
The euro area recovery was supported by a number of favourable cyclical and structural factors. Global output growth gathered pace and helped export demand, while years of balance sheet repair, institution-building and structural reforms in the euro area were also bearing fruit. Moreover, the aggregate fiscal policy stance was broadly neutral. The ECB’s monetary policy measures continued to support money and credit dynamics and played a key role in supporting a pick-up in both household consumption and corporate investment by ensuring low interest rates and a continuation of the favourable financing conditions.
Despite the firm economic recovery, inflation dynamics had yet to show convincing signs of a sustained upward adjustment to a medium-term level below, but close to, 2% consistent with the ECB’s definition of price stability. Underlying inflation pressures were still subdued as labour market slack remained significant. The observed labour market improvements still needed time to translate into more dynamic wage growth. Moreover, it was important to look through the volatility in short-term inflation data, which had limited (if any) implications for the medium-term outlook for price stability.
The solid and broad-based growth performance gave reason for confidence that inflation dynamics would strengthen over time. The Governing Council of the ECB emphasised in this respect that patience, persistence and prudence were needed, as this process was expected to take time and remained contingent on a very substantial degree of monetary policy accommodation.
Global economic growth gained momentum
In 2017 the cyclical upswing of the global economy continued (see Chart 1). The recovery also broadened across countries and components. While consumption continued to be a key driver of global growth, investment demand rebounded, particularly in advanced economies. The recovery in global trade coincided with strengthening business sentiment and a rotation of demand towards more import-intensive regions, in particular Europe.
Global real GDP
(annual percentage changes; quarterly data)
Sources: Haver Analytics, national sources and ECB calculations.
Notes: GDP adjusted using purchasing power parity (PPP) weights. Advanced economies include Australia, Canada, Japan, New Zealand, Norway, Sweden, Switzerland, the United Kingdom and the United States. Commodity exporters comprise Argentina, Brazil, Chile, Colombia, Indonesia, Malaysia, Mexico, Russia, Saudi Arabia, South Africa and Venezuela. Commodity importers include Hong Kong, India, Korea, Singapore, Taiwan, Thailand and Turkey.
The global economic recovery was supported by a number of tailwinds in advanced economies, while strong headwinds in emerging market economies eased. In advanced economies, slack diminished further in both productive capacity and labour markets, as the sources of growth became progressively endogenous. Accommodative policies, as well as rising confidence in both the corporate and household sectors, supported economic activity in advanced economies. In emerging markets, accommodative policies continued to support robust growth in commodity-importing countries, while growth rebounded in commodity-exporting countries thanks to higher commodity prices and a resumption of capital inflows.
OECD labour market developments
Sources: Haver Analytics, Organisation for Economic Co-operation and Development (OECD) and ECB calculations.
Note: Compensation per employee is calculated as the sum of the (seasonally adjusted) annual changes in unit labour costs and labour productivity.
The pick-up in national demand and the declines observed in unemployment had not yet translated into higher wages (see Chart 2), and into stronger core inflation across most major economies. Compared with last year, global inflation excluding food and energy remained broadly stable. Global headline inflation nevertheless moved up, on account of recovering commodity prices (see Chart 3).
OECD inflation rates
(annual percentage changes; monthly data)
Sources: Haver Analytics, OECD and ECB calculations.
Higher commodity prices pushed up global inflation
After trending downwards in the first half of the year from USD 56 per barrel in January to USD 44 per barrel in June, mainly reflecting doubts about the effectiveness of the agreement in 2016 between the Organization of the Petroleum Exporting Countries (OPEC) and major non-OPEC oil-producing countries on production cuts amid strong oil supply from the United States, Brent crude oil prices recovered in the second half of 2017 (see Chart 4). Supporting global inflation developments, they increased to USD 67 per barrel at the end of December, pointing to a market rebalancing on account of stronger than expected demand in 2017, the May 2017 extension of the OPEC/non-OPEC production cuts and outages in some producing countries, leading to a continued reduction in oil inventories. At the end of the year, prices were further supported by geopolitical tensions, expectations of a further extension of the OPEC/non-OPEC supply cut agreement, confirmed by the actual extension to end-2018 on 30 November 2017, as well as strong global demand for oil.
Main developments in commodity prices