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Update on economic and monetary developments


Incoming information since the last Governing Council meeting in early June indicates that, while further employment gains and increasing wages continue to underpin the resilience of the economy, softening global growth dynamics and weak international trade are still weighing on the euro area outlook. Moreover, the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets, is dampening economic sentiment, notably in the manufacturing sector. In this environment, inflationary pressures remain muted and indicators of inflation expectations have declined. Therefore, a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favourable and support the euro area expansion, the ongoing build-up of domestic price pressures and, thus, headline inflation developments over the medium term. Accordingly, the Governing Council adjusted its forward guidance on policy interest rates and underlined its determination to act if the medium-term inflation outlook continues to fall short of its aim.

Survey indicators suggest that global economic activity continued to weaken in the second quarter of 2019 and the drop in the global services output Purchasing Managers' Index in June raises the risk of a more broad-based deterioration in the global growth outlook. Global import growth shifted back into positive territory in April after four months of continued contraction, but heightened trade tensions persist. Global inflation decreased in May, driven largely by a slowdown in energy prices.

Since the Governing Council’s meeting in June 2019, euro area long-term risk-free rates have declined amid market expectations of continuing accommodative monetary policy. Sovereign spreads have remained broadly stable, albeit with a large decrease in Italian spreads. Equity prices have increased, supported by the low risk-free rates, and spreads on corporate bonds have decreased. In foreign exchange markets, the euro has depreciated moderately in trade-weighted terms.

Following an increase of 0.2% in the fourth quarter of 2018, euro area real GDP increased by 0.4%, quarter on quarter, in the first quarter of 2019. Incoming economic data and survey information continue to point to somewhat slower growth in the second and third quarters. This mainly reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector. At the same time, activity in the services and construction sectors is resilient and the labour market continues to improve. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, as well as the mildly expansionary euro area fiscal stance and the ongoing – albeit somewhat slower – growth in global activity.

Euro area annual HICP inflation increased to 1.3% in June 2019, from 1.2% in May, as lower energy price inflation was more than offset by higher HICP inflation excluding food and energy. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months, before rising again towards the end of the year. Looking through the recent volatility due to temporary factors, measures of underlying inflation remain generally muted. Indicators of inflation expectations have declined. While labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets, the pass-through of cost pressures to inflation is taking longer than previously anticipated. Over the medium term underlying inflation is expected to increase, supported by monetary policy measures, the ongoing economic expansion and stronger wage growth.

Monetary dynamics remained resilient despite the fading-out of the positive impact of monthly net purchases under the asset purchase programme (APP) and weaker euro area economic growth. Credit to the private sector remained the main source of money creation and the contribution of net external assets also remained strong. The growth rate of loans to non-financial corporations (NFCs) remained relatively robust, benefiting from bank lending rates at new historical lows and favourable bank lending conditions, despite some tightening of credit standards on NFC loans in the second quarter of 2019. In May 2019 the net issuance of debt securities by euro area NFCs moderated after four consecutive months of strong issuance activity. Market debt financing costs for NFCs continue to be very favourable.

Against this overall background, the Governing Council decided to keep the key ECB interest rates unchanged and expects them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.

The Governing Council confirmed that the Eurosystem will continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when the key ECB interest rates are lifted, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.

In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce forward guidance on policy rates, mitigating measures such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.

External environment

Survey indicators suggest that global economic activity continued to weaken in the second quarter of 2019. The global composite output Purchasing Managers’ Index (PMI) excluding the euro area was unchanged in June (see Chart 1), as a marginal increase in services output was offset by a decline in manufacturing. In quarterly terms, however, the PMI declined in the second quarter to 51.5, from 52.8 in the previous quarter (on the back of a drop in both the manufacturing and services indices since March), which is consistent with a softening in global economic activity. The manufacturing output PMI has been decreasing steadily over the past year and in June fell below the 50 threshold indicating a contraction in activity. After a period of relative stability, the services index also declined in the second quarter, but continues to indicate an expansion. Developments were mixed across countries in the second quarter. Among advanced economies, the composite output PMI decreased in the United States and the United Kingdom (in the latter falling below the expansionary threshold in June), while it increased slightly in Japan. In emerging market economies, the composite output PMI remained broadly unchanged in China, while it decreased in India, Russia and Brazil. In Brazil, it fell below the expansionary threshold despite a moderate pick-up in June.


Chart 1

Global composite output PMI

(diffusion indices)

Sources: Haver Analytics, Markit and ECB calculations.
Notes: The latest observations are for June 2019. “Long-term average” refers to the period from January 1999 to June 2019.

The drop in the global services output PMI in the second quarter increases the risk of a more broad-based deterioration in the global growth outlook. Global growth in investment has declined in the last few quarters, mainly as a result of heightened uncertainty and tighter financing conditions (see Box 1). Aggregate private consumption growth has remained more resilient so far, supported by robust labour markets. However, the decline in the second quarter in the services output PMI, which is closely related to consumption, poses downside risks to the latter’s near-term outlook. Some support for global economic growth could come from the recent loosening of global financial conditions, driven primarily by market expectations of monetary easing in large economies. Nonetheless, risks to the global growth outlook remain to the downside as uncertainty – particularly related to trade tensions – persists.

After four months of continued contraction, global import growth shifted back into positive territory in April. According to data from CPB, global merchandise imports (excluding the euro area) grew marginally in April, following four months of continued contraction (see Chart 2). In emerging economies, imports expanded for the first time in six months (by 0.9%, compared with a drop of 1.0% in March), while in advanced economies they shrank by 0.5%. A wider range of high-frequency trade indicators (also covering May) suggest positive but still weak trade growth in the near term. Nonetheless, the new export orders PMI remained below the expansionary threshold in June (see Chart 2).


Chart 2

Global trade and export orders

(left-hand scale: three-month-on-three-month percentage changes; right-hand scale: diffusion index)

Sources: Markit, CPB Netherlands Bureau for Economic Policy Analysis and ECB calculations.
Note: The latest observations are for April 2019 for global merchandise imports and June 2019 for the PMI.

Heightened trade tensions continue. Trade tensions between the United States and China escalated in May, when the United States announced tariff increases on Chinese imports and China retaliated by raising its tariffs on US imports. At the G20 summit in Osaka at the end of June, however, the two countries reached an agreement to restart trade talks. Moreover, President Trump announced a relaxation of the restrictions on US companies selling equipment to Huawei Technologies which were announced by the US Department of Commerce in mid-May. Other trade issues remain unresolved, however. The US administration has delayed taking a decision on possible increases in car tariffs to mid-November 2019, while talks with the EU on a new trade agreement, announced in July 2018, are still ongoing.

Global inflation decreased in May. Annual consumer price inflation in the Organisation for Economic Co-operation and Development (OECD) countries decreased to 2.3% in May, from 2.5% in April, driven largely by a slowdown in energy prices. Excluding food and energy prices, it slowed marginally to 2.1% in May. Tight labour market conditions across major advanced economies, in particular the United States, have so far translated into only moderate wage increases, suggesting that underlying inflation pressures remain subdued.

Oil prices have increased marginally since early June. Tensions in the Middle East due to the stand-off between the United States and Iran, as well as the agreement by key oil producers to extend their supply cuts by nine months, have supported the oil price. Nonetheless, downward revisions of the expected demand for oil have eased market tightness and weighed on the price. Among non-oil commodities, metal prices have increased amid supply constraints in the iron ore market, while food prices have remained broadly unchanged.

Economic expansion in the United States remains solid but the pace of growth is likely to decelerate. US real GDP expanded at an annualised rate of 3.1% in the first quarter of 2019, up from 2.2% in the previous quarter. The acceleration in the first quarter reflected an upturn in government spending, private inventories and net exports, which were partly offset by slower private consumption. While overall GDP growth remains supported by strong fundamentals, notably a robust labour market, economic activity is expected to have decelerated in the second quarter of this year as the effects of the fiscal stimulus in 2018 faded and the positive inventory effect reversed. Inflationary pressures remain muted. Annual headline CPI inflation slowed slightly to 1.6% in June, from 1.8% in May. The decline was driven mainly by a sharp drop in energy prices. Inflation excluding food and energy increased marginally to 2.1%.

Economic activity strengthened in Japan in the first quarter of 2019, despite weaker sentiment. Real GDP increased by 0.6% quarter on quarter in the first quarter of 2019, after 0.5% in the previous quarter. Growth was mainly supported by net exports, as imports fell strongly, while domestic demand remained subdued. High frequency indicators point to a strengthening in domestic activity in the second quarter. Private consumption growth increased in April and May; this partly reflected the impact of the extended Golden Week holidays in early May, while the increase in durable goods purchases could reflect frontloading ahead of the VAT hike scheduled for October. Stronger consumption in turn supported imports, which rebounded in the second quarter from the exceptionally low levels recorded in the first. Consumer price inflation declined slightly in May to 0.7% from 0.9% in April, reflecting primarily the anticipated decline in accommodation service prices owing to a steep fall in demand following this year’s extension of the Golden Week holidays. Inflation excluding food and energy also moderated in year-on-year terms, to 0.3% from 0.5% in April.

In the United Kingdom, real GDP growth accelerated to 0.5% in the first quarter of 2019 from 0.2% at the end of last year, mainly on the back of Brexit-related stock-building. Domestic demand contributed positively, while net trade reduced GDP growth as imports surged. Business investment increased following four quarters of contraction. A strong quarter-on-quarter growth contribution from inventories, as well as the exceptionally high import growth, reflected increased stockpiling against a background of growing fears of a “no-deal” Brexit at the end of March. Overall, economic activity is expected to remain muted in the coming quarters, given high Brexit-related uncertainty and wider concerns related to global economic developments. Annual CPI inflation was 2.0% in June 2019, unchanged from May.

Economic growth in China slowed in the second quarter. Annual real GDP growth declined to 6.2% year-on-year from 6.4% in the first quarter. Final consumption was the main contributor to growth. The decline in its contribution was offset by a rising contribution from capital formation, while the contribution from net exports declined. June data on industrial production, retail sales and fixed-asset investment suggest growth has been picking up, after weaker outcomes in the previous two months. The authorities have indicated they intend to maintain monetary and fiscal support to stabilise growth in line with the official target for 2019 of 6.0%-6.5%. Annual headline CPI inflation was stable in June at 2.7%, while inflation excluding food and energy remained at 1.6%.

Financial developments

Long-term sovereign yields have declined in the euro area, continuing the downward trend that started in late 2018. During the period under review (from 6 June to 24 July 2019) the GDP-weighted euro area ten-year sovereign bond yield declined by 29 basis points to 0.19% amid market expectations of continuing accommodative monetary policy (see Chart 3). Ten-year sovereign bond yields in the United States and United Kingdom also decreased over the review period, to around 2.05% and 0.68% respectively.


Chart 3

Ten-year sovereign bond yields

(percentages per annum)

Sources: Thomson Reuters and ECB calculations.
Notes: Daily data. The vertical grey line denotes the start of the review period on 6 June 2019. The latest observation is for 24 July 2019.

Euro area sovereign bond spreads relative to the risk-free OIS rate remained broadly stable, although there was a large decrease in Italian spreads. The spread on German sovereign bonds rose by 8 basis points to ‑0.27%, while spreads on French bonds remained unchanged at 0.00%. Spanish and Portuguese spreads declined marginally by around 3 basis points, to 0.47% and 0.54% respectively. Following the European Commission’s decision not to pursue an excessive deficit procedure against Italy, spreads on Italian sovereign bonds decreased by 77 basis points, to around 1.60%.

Broad indices of euro area equity prices rose amid lower risk-free rates. Over the review period equity prices of euro area financials and non-financial corporations (NFCs) increased by 3.3% and 6.2% respectively. Equity prices were mainly supported by decreasing risk-free rates, reflecting expectations of more accommodative monetary policy, and by positive developments in earnings expectations for NFCs.

Euro area corporate bond spreads narrowed over the review period. In line with the above-mentioned gains in equity prices, the spread on investment‑grade NFC bonds relative to the risk-free rate has declined by around 20 basis points since the beginning of the review period to stand at 60 basis points. Spreads on financial sector debt have also fallen by around 20 basis points to 77 basis points. Overall, although corporate bond spreads are currently higher than the lows reached in early 2018, they remain some 50 basis points below the levels observed in March 2016, prior to the announcement and subsequent launch of the corporate sector purchase programme.

The euro overnight index average (EONIA) stood, on average, at ‑36 basis points over the review period. Excess liquidity decreased by approximately €199 billion to around €1,705 billion. The decline in excess liquidity mainly reflects an increase in liquidity-absorbing autonomous factors and, to a lesser extent, voluntary repayments in the second series of targeted longer-term refinancing operations (TLTRO II).

The EONIA forward curve shifted further downwards over the review period. The curve reached a low of around ‑0.6% for horizons slightly longer than one year. Overall, the curve remains below zero for horizons up to 2025, reflecting market expectations of a prolonged period of negative interest rates.

In foreign exchange markets, the euro depreciated in trade-weighted terms over the review period (see Chart 4). The nominal effective exchange rate of the euro, as measured against the currencies of 38 of the euro area’s most important trading partners, depreciated by 1.3%. This reflected a weakening of the euro against the US dollar (by 1.1%), the Chinese renminbi (by 1.7%), the Japanese yen (by 1.2%) and the Swiss franc (by 1.7%). The value of the euro also fell vis-à-vis the currencies of most emerging market economies. At the same time, the euro appreciated against the pound sterling (by 0.7%) in the light of the uncertainty around Brexit.


Chart 4

Changes in the exchange rate of the euro vis-à-vis selected currencies

(percentage changes)

Source: ECB.
Notes: “EER‑38” is the nominal effective exchange rate of the euro against the currencies of 38 of the euro area’s most important trading partners. All changes have been calculated using the foreign exchange rates prevailing on 24 July 2019.

Economic activity

Although GDP growth in the first quarter of 2019 was somewhat better than expected, incoming data and survey information point to somewhat weaker growth in the coming quarters. Real GDP increased by 0.4%, quarter on quarter, in the first quarter of 2019, following growth of 0.2% in the final quarter of 2018 (see Chart 5). Domestic demand and net trade contributed positively to GDP growth in the first quarter, whereas the contribution from changes in inventories was neutral. Economic indicators point to ongoing but somewhat slower growth in the second and third quarters of 2019.


Chart 5

Euro area real GDP, Economic Sentiment Indicator and composite output Purchasing Managers’ Index

(left-hand scale: diffusion index; right-hand scale: quarter-on-quarter percentage changes)

Sources: Eurostat, European Commission, Markit and ECB calculations.
Notes: The Economic Sentiment Indicator (ESI) is standardised and rescaled to have the same mean and standard deviation as the Purchasing Managers’ Index (PMI). The latest observations are for the first quarter of 2019 for real GDP, June 2019 for the ESI and July 2019 for the PMI.

Euro area labour markets remained robust. Employment increased by 0.4% in the first quarter of 2019, up from 0.3% in the fourth quarter of 2018, benefiting from robust output growth. Employment growth was broad-based across countries and sectors. In particular, it remained robust when compared with GDP growth. Employment has risen for 23 consecutive quarters since mid‑2013, with the number of people employed increasing by almost 11 million. Meanwhile, productivity per person employed increased by 0.1% in quarter-on-quarter terms in the first quarter of 2019, after small declines in the second half of 2018.

Looking ahead, recent data and survey indicators continue to point to positive employment growth. The euro area unemployment rate stood at 7.5% in May, down from 7.6% in April, and is gradually approaching pre-crisis levels. Short-term survey indicators, despite declining from the high levels recorded in 2018, continue to suggest positive employment growth in the near future.


Chart 6

Euro area employment, PMI assessment of employment and unemployment

(left-hand scale: quarter-on-quarter percentage changes; diffusion index; right-hand scale: percentage of labour force)

Sources: Eurostat, Markit and ECB calculations.
Notes: The PMI is expressed as a deviation from 50 divided by 10. The latest observations are for the first quarter of 2019 for employment, July 2019 for the PMI and May 2019 for the unemployment rate.

Rising employment continues to support household income and consumer spending. Private consumption rose by 0.5%, quarter on quarter, in the first quarter of 2019, following somewhat weaker growth in the previous quarter. Household real disposable income has been largely insulated from the recent growth slowdown. Annual growth of real gross disposable income rose from 1.5% in the fourth quarter of 2018 to 2.7% in the first quarter of 2019. Overall, employment growth has remained resilient during the recent growth slowdown, supporting labour income. In addition, lower direct taxes and social security contributions have contributed positively to households’ purchasing power, reflecting fiscal measures in a number of euro area countries (notably in France and Italy). The saving ratio increased further in the first quarter of 2019, as income growth outpaced consumption growth.

Looking ahead, private consumption should continue to grow steadily. Recent data on the volume of retail sales and new passenger car registrations point to higher consumer spending in the second quarter of 2019. Other indicators support the picture of steady consumption dynamics. Consumer confidence, which had been on a broadly declining trend since the end of 2017, stabilised in the first and second quarters of 2019. In July it increased slightly, remaining at a level above its long-term average. The latest survey results also signal further labour market improvements, which should continue to support household income and consumer spending.

Investment growth is expected to remain modest in the near term. Non-construction investment contracted by 1.1% in the first quarter of 2019, quarter on quarter, following robust growth of 1.8% in the fourth quarter of 2018. In contrast, quarterly growth in construction investment accelerated to 1.4% in the first quarter of 2019, supported by dynamic residential investment growth of 0.9%. Overall, gross fixed capital formation saw a slight upward move, increasing by 0.1% in quarter-on-quarter terms. Recent survey results point to a continued moderation of non-construction investment growth. Capital goods sector confidence decreased in June, reflecting a drop in sentiment, on average, in the second quarter of 2019. Moreover, the monthly industrial production index for capital goods production in April and May stood, on average, at a level below the average seen in the first quarter of 2019. Other indicators, such as new orders and new export orders, are also consistent with muted investment growth in the near term in a context of global uncertainty and weaker foreign demand. In particular, a further increase in uncertainty regarding the outlook for global trade may pose a downside risk to investment growth by dampening orders and production expectations and thus delaying investment decisions. With regard to construction investment, the index for construction production contracted in both April and May while the Purchasing Manager’s Index (PMI) and the European Commission’s confidence index for the construction sector up to June still pointed to continued – but moderating – growth for construction investment in the second quarter of 2019.

After an upward surprise in the first quarter of 2019, euro area trade does not appear to be gaining momentum. The positive (0.2%) net trade contribution to euro area GDP growth in the first quarter of 2019 was primarily driven by extraordinarily strong exports to the United Kingdom, which were most likely associated with an exceptional increase in inventories by companies in that country in the run-up to the original Brexit date. Available nominal data on euro area trade in goods until May are relatively volatile and point to a worsening of imports and exports in the second quarter of 2019 (-0.5% and ‑0.4%, respectively, in quarter-on-quarter terms). This decline has mostly been driven by extra-euro area trade developments. In particular, euro area exports to the United Kingdom posted a strong correction in April while exports to the United States, China and Turkey remained subdued. Looking ahead, leading indicators for euro area exports show no clear sign of a bottoming out. The flash PMI for new manufacturing export orders declined to 44.3 in July and remained in contractionary territory. The European Commission’s assessment of order books fell to ‑14.1 in June, its lowest level since November 2013. Shipping indicators, however, provide a more optimistic picture for the coming months.

Incoming data and survey results suggest somewhat weaker growth in the second and third quarters of 2019. This softening of growth can be primarily attributed to weak global trade and the prolonged presence of uncertainties. For instance, although industrial production rose by 0.9% in May, month on month, in April and May it remained on average at a level slightly below the average for the first quarter of 2019. As regards more timely survey data, in the second quarter of 2019 the European Commission’s Economic Sentiment Indicator stood, on average, below its average level in the first quarter. Meanwhile, the composite output PMI rose slightly between the first and second quarters, before declining in July.

Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions. In addition, growth should also be underpinned by further employment gains, rising wages, lower energy prices, and the ongoing – albeit somewhat slower – expansion in global activity. The results of the latest round of the ECB Survey of Professional Forecasters, conducted in early July, show that the private sector GDP growth forecasts for 2019, 2020 and 2021 have remained broadly unchanged compared with the previous round conducted in early April.

The risks surrounding the euro area growth outlook remain tilted to the downside. This reflects the prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets.

Prices and costs

HICP inflation rose to 1.3% in June 2019, up from 1.2% in May 2019. This increase was attributable mainly to higher HICP inflation excluding energy and food, which more than offset lower energy price inflation.


Chart 7

Contributions of components of euro area headline HICP inflation

(annual percentage changes; percentage point contributions)

Sources: Eurostat and ECB calculations.
Notes: The latest observations are for June 2019. Growth rates for 2015 are distorted upwards owing to a methodological change (see the box entitled “A new method for the package holiday price index in Germany and its impact on HICP inflation rates”, Economic Bulletin, Issue 2, ECB, 2019).

Measures of underlying inflation remained generally muted and continued to move sideways. HICP inflation excluding energy and food increased to 1.1% in June, up from 0.8% in May. However, this was attributable mainly to calendar effects, particularly evident in the sharp rise in prices of package holidays, which are expected to decline again in July. HICP inflation excluding energy and food is subject to short-term volatility in prices for travel-related items and clothing, which blurs the signals conveyed by this index regarding movements in underlying inflation. Measures that help to abstract from this volatility remained broadly unchanged. For example, HICP inflation excluding energy, food, travel-related items and clothing stood at 1.1% in June, as in the previous month. Signals from other measures of underlying inflation, including the Persistent and Common Component of Inflation (PCCI) indicator and the Supercore indicator,[1] also pointed to a continuation of the broad sideways movement now seen for several quarters.

Supply chain price pressures for HICP non-energy industrial goods declined, but remained well above their historical average in the later stages of the supply chain. The annual rate of change in producer prices for domestic sales of non-food consumer goods was 0.8% in May, down from 0.9% in April, but still above its historical average of 0.55%. Having risen steadily from a low of 0.3% in December 2018 to 1.7% in April 2019, the corresponding annual rate of change in import prices fell to 1.1% in May. Price pressures also decreased at the very early stages of the pricing chain, with both oil and non-oil commodity prices recording a year-on-year decline.

Wage growth remained robust. Annual growth in compensation per employee stood at 2.2% in the fourth quarter of 2018 and 2.3% in the first quarter of 2019. The outturn for the first quarter of 2019 was affected by a significant drop in social security contributions.[2] Looking through such temporary factors, annual growth in compensation per employee growth has stabilised since mid‑2018 at a level slightly above its historical average of 2.1%.[3]

Market-based measures of longer-term inflation expectations remained broadly unchanged, while survey-based expectations decreased slightly. The five-year forward inflation-linked swap rate five years ahead stood at 1.29%, broadly in line with the level that prevailed in early June, but following some notable intra-period volatility (see Chart 8). The market-based probability of deflation remains very contained, despite exhibiting an increasing trend over the review period. At the same time, the forward profile of market-based measures of inflation expectations continues to point to a prolonged period of low inflation, with only a very gradual return to inflation levels that are below, but close to, 2% over the medium term. The results of the ECB Survey of Professional Forecasters (SPF) for the third quarter of 2019 reported point forecasts for annual HICP inflation averaging 1.3%, 1.4% and 1.5% for 2019, 2020 and 2021 respectively. These results represent downward revisions of 0.1 percentage points for each of those years compared with the previous survey round. Average longer-term inflation expectations declined from 1.8% to 1.7%.


Chart 8

Market and survey-based measures of inflation expectations

(annual percentage changes)

Sources: ECB Survey of Professional Forecasters (SPF), Eurosystem staff macroeconomic projections for the euro area (June 2019) and Consensus Economics.
Notes: The SPF for the third quarter of 2019 was conducted between 1 and 5 July 2019. The market-implied curve is based on the one-year spot inflation rate and the one-year forward rate one year ahead, the one-year forward rate two years ahead, the one-year forward rate three years ahead and the one-year forward rate four years ahead. The latest observations for market-implied inflation are for 24 July 2019.

Money and credit

Monetary dynamics remained resilient despite the fading-out of the positive impact of monthly net purchases under the asset purchase programme (APP) and weaker euro area economic growth. The annual growth rate of M3 stood at 4.5% in June 2019, down from 4.8% in May, on account of a negative base effect, thus returning to the levels seen in March 2019 (see Chart 9). M3 growth continued to be supported by lower opportunity costs of holding M3. The positive contribution of net purchases under the APP to annual M3 growth has continued to fade out and is now marginal. The narrow monetary aggregate M1 has also continued to grow at a robust pace: its annual growth rate of 7.2% in June 2019, unchanged from May, is one percentage point higher than its local trough in January 2019. Among the M1 components, the annual growth of currency in circulation remained solid, though not exceptionally high by historical standards, pointing to no pervasive substitution into cash. Looking ahead, the current level of real M1 growth continues to indicate that an imminent recession in the euro area is unlikely.


Chart 9

M3 and its counterparts

(annual percentage changes; contributions in percentage points; adjusted for seasonal and calendar effects)

Source: ECB.
Notes: Credit to the private sector includes MFI loans to the private sector and MFI holdings of securities issued by the euro area private non-MFI sector. As such, it also covers the Eurosystem’s purchases of non-MFI debt securities under the corporate sector purchase programme. The latest observation is for June 2019.

While credit to the private sector remained the main source of money creation, external monetary flows also contributed strongly to money growth. The contribution of credit to the private sector to broad money growth picked up in June 2019, after having stabilised in recent months (see the blue bars in Chart 9), against the backdrop of weaker economic activity overall since the second half of 2018. An important item that compensated for the declining mechanical contribution of the APP in recent months (see the red bars in Chart 9) has been the increase in net external assets (see the yellow bars in Chart 9), which has contributed positively to M3 growth since October 2018. However, the strong increase in the contribution of external monetary flows to annual M3 growth, which coincided with increased interest in the euro area from foreign investors, tends to be volatile and may therefore not be durable. The contribution from credit to the government from euro area monetary financial institutions (MFIs) excluding the Eurosystem (see the light green bars in Chart 9) to M3 growth remained marginally negative, after having been significantly negative during the period of net purchases under the APP, when banks tended to reduce their government bond holdings. Likewise, the drag from longer‑term financial liabilities on annual broad money growth remained small (see the dark green bars in Chart 9).

Euro area non-financial corporation (NFC) loan growth remained relatively robust, benefiting from bank lending rates at new historical lows. The annual growth rate of MFI loans to the private sector (adjusted for loan sales, securitisation and notional cash pooling) increased to 3.5% in June 2019, from 3.3% in May (see Chart 10). After having moderated until January 2019 (to 3.4%), annual NFC loan growth remained unchanged at 3.8% in June 2019. This development has been in line with the lagging cyclical pattern of NFC loans with respect to real economic activity and the slowdown in aggregate demand observed over the course of 2018. NFC loan growth, however, remained not far from its September 2018 peak of 4.3%. Loans to households grew at an annual rate of 3.3% in June 2019, unchanged from May. Overall, loan growth continued to benefit from historically low bank lending rates and the overall favourable supply of bank loans. In addition, banks have made progress in consolidating their balance sheets, although the volume of non‑performing loans remains substantial in some countries and may have led to tighter lending conditions, as also indicated by the July 2019 euro area bank lending survey (see below).[4]


Chart 10

Loans to the private sector

(annual growth rate)

Source: ECB.
Notes: Loans are adjusted for loan sales, securitisation and notional cash pooling. The latest observation is for June 2019.

According to the euro area bank lending survey, credit standards for loans to enterprises tightened amid concerns about the economic outlook. While banks had expected a slight net easing in the previous survey round, credit standards (i.e. banks’ internal guidelines or loan approval criteria) for loans to enterprises tightened in the second quarter of 2019, marking the end of the net easing period that had begun in 2014. The net tightening of banks’ loan approval criteria was driven mainly by a tightening contribution of risk perceptions related to a deterioration in the general economic and firm-specific situation, whereas competition exerted pressure in the opposite direction. At the same time, credit standards for households remained broadly unchanged. Loan demand, as reported in the survey, increased across all loan categories in the second quarter of 2019. Although financing needs for fixed investment and the low level of interest rates were supportive for NFC loan demand in the second quarter of 2019, financing needs for inventories and working capital were not, reflecting this factor’s sensitivity to the business cycle. Demand for housing loans continued to increase in the second quarter of 2019, supported by the low interest rate level and housing market prospects, which were still improving. Euro area banks also indicated that they had improved access to retail and wholesale funding in the second quarter of 2019, in particular for debt securities. Banks stated that the impact of regulatory or supervisory actions and non-performing loans also had a tightening effect on credit standards. The tightening impact of non-performing loans was less pronounced than in the previous semester, but banks expect some reversal over the next six months.

Very favourable bank lending rates continued to support euro area economic growth. In May 2019 the composite bank lending rates for both loans to NFCs and housing loans reached new historical lows of 1.57% and 1.73% respectively (see Chart 11). These rates have fallen significantly and by more than market reference rates since the ECB’s credit easing measures were announced in June 2014. They have also declined by more than 40 basis points since February 2016, i.e. just before the last cut of the deposit facility rate (by 10 basis points to ‑0.4%). The reduction in bank lending rates for loans to NFCs and for loans to small firms (assuming that very small loans of up to €0.25 million are primarily granted to small firms) was particularly significant in those euro area countries that were most exposed to the financial crisis. Overall, this indicates a more uniform transmission of monetary policy to bank lending rates across euro area countries and firm sizes.


Chart 11

Composite bank lending rates for NFCs and households

(percentages per annum)

Source: ECB.
Notes: Composite bank lending rates are calculated by aggregating short and long-term rates using a 24‑month moving average of new business volumes. The latest observation is for May 2019.

In May 2019 the net issuance of debt securities by euro area NFCs moderated after four consecutive months of strong issuance activity. The latest ECB data indicate that, on a net basis, the total flow of debt securities issued by NFCs moderated in May 2019, but remained positive, as has been the case since the beginning of 2019. The increase in the cumulated net flow of issuance in the first five months of 2019 was in line with the seasonal pattern observed over the last few years. Furthermore, the five-month cumulated increase in 2019 was the highest since 2012. From a more medium-term perspective (see Chart 12), the annual flows of debt securities remain low owing to subdued issuance activity in 2018. In May 2019 the annual net issuance of debt securities was slightly below €50 billion, which is close to the level at which the annual flows of debt securities seem to have settled since November 2018. Available market data suggest that net flows of debt securities issued continued to be relatively strong in June 2019 but remained virtually flat in July. In May 2019 total net issuance of quoted shares by NFCs turned slightly negative, thus continuing its downward trend that had started at the end of 2018 and was only broken temporarily in April 2019. As a consequence of this persistent weakness, in May 2019 the annual flows of net issuance of quoted shares were the lowest on record since October 2017.


Chart 12

Net issuance of debt securities and quoted shares by euro area NFCs

(annual flows in EUR billions)

Source: ECB.
Notes: Monthly figures based on a 12‑month rolling period. The latest observation is for May 2019.

Financing costs for euro area NFCs increased marginally in May 2019 after having declined continuously since the end of 2018. The overall nominal cost of external financing for NFCs, comprising bank lending, debt issuance in the market and equity finance, stood at 4.5% in May 2019 and is projected to have also remained stable at that level in June and July. The cost of financing in July 2019 is estimated to be only 9 basis points above the historical low of April 2019 and much below the levels observed in the summer of 2014. The estimated increase in the cost of financing since April 2019 is entirely accounted for by the increase in the cost of equity that was only partially balanced by further declines in the cost of market‑based debt, which in July 2019 is estimated to have settled at its historical low. Since April the increase in the cost of equity has been due to a rise in the risk premium, reflecting recurrent global trade tensions and Brexit-related risks, among other things. More recently, the cost of equity has declined slightly, owing in part to ensuing expectations of further monetary easing.


What is behind the decoupling of global activity and trade?

Prepared by Alina Bobasu, Simona Manu and Lucia Quaglietti

This box looks at the softness in global trade observed since the second half of 2018, focusing in particular on the causes of its decoupling from economic activity. Having already slowed in the third quarter of 2018, world trade contracted at the turn of the year (see Chart A). The deceleration was broad-based across regions. Trade deteriorated particularly sharply in China and in emerging Asia, which had recorded strong increases in 2017, but it also weakened in Latin America, Japan and the United States in the first quarter of 2019 (see Chart B). In contrast, import growth surged in the United Kingdom, probably owing to stock building by UK firms in the face of Brexit-related uncertainty. While global GDP growth has also slowed, the decline was less pronounced than for world trade. Due to significant movements in the most import-intensive categories of expenditure, such as investment and inventories, over the business cycle, trade can be subject to larger swings than activity (see Chart A). For example, world trade remained subdued in the period from the second quarter of 2014 to the third quarter of 2015, while in 2017 it significantly outstripped global activity growth. The decline in trade observed in recent quarters may reflect several factors. These include cyclical and compositional factors, but also influences stemming from rising trade tensions between the United States and China.[5] This box aims to shed light on the reasons behind the recent weakness in global trade and its decoupling from activity.


Services trade liberalisation and global imbalances: a critical review of the empirical evidence

Prepared by Georgios Georgiadis and Andrej Mijakovic

It is widely acknowledged that trade liberalisation raises aggregate welfare in the long run. [6] Trade liberalisation within the framework of multilateral cooperation has been a key factor driving global economic prosperity. Trade integration helped to drive economic growth in advanced and developing economies in the second part of the 20th century, thereby also helping to lift hundreds of millions of people out of poverty.


Euro area foreign direct investment since 2018: the role of special purpose entities

Prepared by Virginia di Nino

In 2018 gross foreign direct investment (FDI) flows in the euro area experienced a reversal for the first time since the inception of the euro. [7] FDI flows have decreased on both the liability side and the asset side since early 2016, when gross flows accounted for around 9% of euro area GDP (see Chart A).[8] In 2018 FDI liability flows became positive, suggesting disinvestments of either foreign parents outside the euro area or affiliates resident in the euro area, then FDI asset flows turned negative, implying disinvestments of either parents resident in the euro area or foreign affiliates outside the euro area. It is important to track gross flow dynamics as they can signal changes in international market conditions.[9] Like other mature and developed economies, the euro area tends to be a net foreign lender and, despite the reversal in gross flows, it posted net FDI outflows (gross asset flows minus gross liability flows) within the historical range in 2018. Cumulated gross FDI flows continued the reversal in early 2019 but they may be beginning to normalise. Liabilities gross flows recently recorded a recovery, which resulted in net capital inflows in the euro area, although this is likely to be temporary.


Sources of economic policy uncertainty in the euro area: a machine learning approach

Prepared by Andrés Azqueta-Gavaldón, Dominik Hirschbühl, Luca Onorante and Lorena Saiz

Global policy uncertainty has recently increased and remains relatively high. Uncertainty about global trade disputes, the economic challenges stemming from climate change and geopolitical factors are contributing to increased levels of policy-related uncertainty in Europe. Understanding the sources and dynamics of uncertainty which hits the economy is valuable for policymakers, including central banks. Firms are particularly sensitive to uncertainty when making their investment decisions.[10] In response to uncertainty shocks, they may reduce their investment, hiring or orders for foreign intermediates, leading to a deceleration in trade and aggregate investment. Consumers, in turn, may react to increased uncertainty by postponing consumption and increasing precautionary savings, as reflected in the rise in the household saving rate in 2018. This can lead to a contraction in international trade and domestic economic activity.[11]


What is behind the change in the gap between services price inflation and goods price inflation?

Prepared by Luigi Ferrara

Services price inflation tends to be much higher than non-energy goods price inflation. This tendency has not only been a feature of the euro area economy over the past 20 years but has also been observed in the US economy. The gap and its variation over time, which implies a changing speed in the evolution of relative prices, indicate that aggregate inflation developments typically reflect more than a generalised change in the purchasing power of money. Understanding the nature of the demand and supply forces that underlie relative price developments is an important element of inflation analysis. Against this background, this box reviews some of the features and sources of the gap between services price inflation and non-energy industrial goods price inflation in the euro area.[12]


Country-specific recommendations for economic policies under the 2019 European Semester

Prepared by Nico Zorell

On 5 June 2019 the European Commission issued its annual policy recommendations for EU Member States under the 2019 European Semester. The European Semester is the EU’s annual policy coordination cycle. In this respect, the country-specific recommendations (CSRs) are a source of guidance for Member States when designing their economic and fiscal policies for the following year. This box examines all policy recommendations addressed to euro area countries, with the exception of those pertaining to fiscal policy.[13]


Priorities for fiscal policies under the 2019 European Semester

Prepared by Stephan Haroutunian, Sebastian Hauptmeier and Nadine Leiner-Killinger

On 5 June the European Commission issued its 2019 European Semester Spring Package of policy recommendations for EU Member States. The package includes country-specific recommendations (CSRs) for economic and fiscal policies in 2020 for all Member States.[14] It also contains recommendations regarding the implementation of the European Union’s Stability and Growth Pact (SGP) for some countries.[15] With regard to fiscal policies, the recommendations are based on the Commission’s 2019 spring forecast and its assessment of countries’ policy plans as reflected in the updates of the stability and convergence programmes released in April. This box examines the fiscal policy recommendations addressed to the euro area countries. The examination shows that in countries with high levels of government debt, building buffers to strengthen resilience in cyclical downturns remains a priority for fiscal policies. At the same time, countries that have achieved sound fiscal positions could utilise some fiscal space for measures to support economic growth.



Global value chain participation and exchange rate pass-through to export and import prices

Prepared by Georgios Georgiadis and Johannes Gräb

Many studies suggest that advanced economies’ import prices have become less sensitive to exchange rate movements over the last few decades. Since exchange rate movements would in this case result in smaller changes in trade prices and quantities, exchange rates would have also become less important in the transmission of domestic and international shocks, which has important implications for monetary policy and the way it is transmitted to the economy. This article suggests that part of the likely decline in exchange rate pass-through to import prices is a result of the rise of global value chains. As production increasingly relies on imported intermediate goods, production costs and hence export prices become more sensitive to exchange rate changes. However, this effect also increasingly offsets the variation in import prices caused by exchange rate changes. Hence the existence of cross-country production linkages may amplify exchange rate pass-through to export prices but thereby dampen exchange rate pass-through to import prices.


Social spending, a euro area cross-country comparison

Prepared by Marta Rodríguez-Vives and Linda Kezbere

At a time of high government indebtedness, low structural economic growth and ageing populations, a key element in today’s policy debate is the role of government in providing its services and distributing resources to society. Government decisions on tax and social benefit systems have an important bearing on macroeconomic performance in the euro area. This article focuses on how social spending on individual households or on the provision of collective goods and services is organised in euro area countries. Choices made concerning the level and structure of social spending are country-specific and reflect societal policy preferences. The aim of this article is to review government social spending across euro area countries and how it has evolved since the pre-crisis period. It also zooms in on the different social insurance systems in euro area countries in terms of pensions and health and looks at spending on education. We devote particular attention to the analysis of pensions, as pensions represent the biggest social spending item in all countries. The article suggests that countries should look for policies and reforms to ensure the sustainability of social spending, especially in view of ageing populations and possible negative economic shocks.


Understanding the crypto-asset phenomenon, its risks and measurement issues

Prepared by Maria Teresa Chimienti, Urszula Kochanska and Andrea Pinna

This article discusses the crypto-asset phenomenon with a view to understanding its potential risks and enhancing its monitoring. First, it describes the characteristics of the crypto-asset phenomenon, in order to arrive at a clear definition of the scope of monitoring activities. Second, it identifies the primary risks of crypto-assets that warrant continuous monitoring – these risks could affect the stability and efficiency of the financial system and the economy – and outlines the linkages that could cause a risk spillover. Third, the article discusses how, and to what extent, publicly available data allow the identified monitoring needs to be met and, by providing some examples of indicators on market developments, offers insights into selected issues, such as the availability and reliability of data. Finally, it covers selected statistical initiatives that attempt to overcome outstanding challenges.



Statistical annex

© European Central Bank, 2019

Postal address 60640 Frankfurt am Main, Germany

Telephone +49 69 1344 0


All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

This Bulletin was produced under the responsibility of the Executive Board of the ECB. Translations are prepared and published by the national central banks.

The cut-off date for the statistics included in this issue was 24 July 2019.

For specific terminology please refer to the ECB glossary (available in English only).

ISSN 2363‑3417 (html)

ISSN 2363‑3417 (pdf)

DOI 10.2866/429865 (html)

EU catalogue No QB‑BP‑19‑005‑EN‑Q (html)

EU catalogue No QB‑BP‑19‑005‑EN‑N (pdf)

  1. For further information on these measures of underlying inflation, see Boxes 2 and 3 in the article entitled “Measures of underlying inflation for the euro area”, Economic Bulletin, Issue 4, ECB, 2018.
  2. This is associated with the tax credit for employment and competitiveness (crédit d’impôt pour la compétitivité et l’emploi – CICE) in France, which was replaced by a permanent cut in employers’ social security contributions in the first quarter of 2019.
  3. The historical average is based on data from the first quarter of 1999 to the first quarter of 2019.
  4. See also Chapter 3 of the “Financial Stability Review”, ECB, May 2019.
  5. For a detailed discussion of the macroeconomic implications of rising protectionism, see the article entitled “The economic implications of rising protectionism: a euro area and global perspective”, Economic Bulletin, Issue 3, ECB, 2019.
  6. See for example Making trade an engine of growth for all, staff of the International Monetary Fund, World Bank and World Trade Organization, 2017.
  7. This box discusses evidence obtained from a four-quarter sum of foreign direct investment flows. It is common practice to assess sums or average developments as these smooth out some of the volatility of the high-frequency foreign direct investment data. Developments in quarterly data were also checked and the major findings still qualitatively hold.
  8. On an asset/liability basis, direct investment is classified according to whether the investment relates to an asset or a liability for the country compiling the statistics. For example, a country’s liabilities include foreign parents’ equity investments in affiliates resident in that country because those investments represent claims that foreigners have on assets in the reporting country. On the same basis, in the compilation of FDI statistics, parent companies resident in a euro area country and investing in debt issued by their affiliates resident outside of the euro area are assets for the euro area. See “Implementing the latest international standards for compiling foreign direct investment statistics: Asset/liability versus directional presentation”, OECD, December 2014.
  9. Extensive literature has shown that certain characteristics of the recipient country, such as size, productivity and economic growth dynamics, cultural and colonial ties, and distance and quality of institutions, are important determinants of net FDI. Similarly, another strand of the literature has shown that net FDI is relevant for the productivity and economic growth of emerging countries. On the other hand, a drying-up of gross capital flows, both in emerging countries and in developed economies, may precede the onset of a financial crisis. This was the case for the bursting of the “dot-com bubble” in 2001, the global financial crisis of 2008 and the European debt crisis in 2012.
  10. See Gulen, H. and Ion, M., “Policy Uncertainty and Corporate Investment”, The Review of Financial Studies, Vol. 29(3), 2016, pp. 523‑564.
  11. See Handley, K. and Limão, N., “Trade and Investment under Policy Uncertainty: Theory and Firm Evidence”, American Economic Journal: Economic Policy, Vol. 7(4), 2015, pp. 189‑222, and the article entitled “The impact of uncertainty on activity in the euro area”, Economic Bulletin, Issue 8, ECB, 2016.
  12. For an analysis of the inflation gap in the euro area up to 2008, see the box entitled “Why is services inflation higher than goods inflation in the euro area?”, Monthly Bulletin, ECB, January 2009. This feature is also discussed in Cœuré, B., “The rise of services and the transmission of monetary policy”, speech given at the 21st Geneva Conference on the World Economy, 16 May 2019.
  13. For details of the 2019 CSRs related to fiscal policy, see the box entitled “Priorities for fiscal policies under the 2019 European Semester” in this issue of the Economic Bulletin.
  14. See also the box entitled “Country-specific recommendations for economic policies under the 2019 European Semester” in this issue of the Economic Bulletin.
  15. The CSRs were finalised and adopted by the Economic and Financial Affairs Council on 9 July 2019.