Economic and monetary developments

Overview

Based on a thorough assessment of the economic and inflation outlook for the euro area, also taking into account the latest staff macroeconomic projections, the Governing Council took a number of decisions at its monetary policy meeting on 12 September in pursuit of its price stability objective. Incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures. This is reflected in the September staff projections, which show a further downgrade of the inflation outlook. At the same time, robust employment growth and increasing wages continue to underpin the resilience of the euro area economy. Against this overall backdrop, the Governing Council announced a comprehensive package of monetary policy measures in response to the continued shortfall of inflation with respect to its aim (see Box 1).

Economic and monetary assessment at the time of the Governing Council meeting of 12 September 2019

Global growth softened in the first half of 2019, reflecting decelerating economic activity in both advanced and emerging economies. This is in line with survey-based indicators which point to subdued global activity. Global growth is projected to decline this year amid weak global manufacturing activity on the back of declining global investment and rising policy and political uncertainty on account of Brexit and the renewed intensification of trade tensions between the United States and China. Looking ahead, global growth is projected to gradually recover over the medium term but to remain below its long-term average. Global trade is expected to further weaken significantly this year but to recover in the medium term, while remaining more subdued than economic activity. Global inflationary pressures are expected to remain contained, while downside risks to global economic activity have intensified.

Global long-term risk-free rates have declined since the Governing Council meeting in June 2019 amid market expectations of further accommodative monetary policy and a resurgence of global trade uncertainty. This decline in risk-free rates has supported the prices of euro area equities and corporate bonds. Meanwhile, corporate earnings expectations have fallen somewhat in response to persistent doubts about the global macroeconomic outlook. The EONIA forward curve also shifted downwards. In foreign exchange markets, the euro remained broadly unchanged in trade-weighted terms.

Euro area real GDP increased by 0.2%, quarter on quarter, in the second quarter of 2019, following a rise of 0.4% in the previous quarter. Incoming economic data and survey information continue to point to moderate but positive growth in the third quarter of this year. This slowdown in growth mainly reflects the prevailing weakness of international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector. At the same time, the services and construction sectors are showing ongoing resilience and the euro area expansion is also supported by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the ongoing – albeit somewhat slower – growth in global activity.

This assessment is broadly reflected in the September 2019 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021. Compared with the June 2019 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down for 2019 and 2020. The risks surrounding the euro area growth outlook remain tilted to the downside. These risks mainly pertain to the prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.0% in August 2019, which is unchanged from July. Lower energy inflation was offset by higher food inflation, while the rate of HICP inflation excluding food and energy was unchanged. On the basis of current futures prices for oil, headline inflation is likely to decline before rising again towards the end of the year. Measures of underlying inflation remained generally muted and indicators of inflation expectations stand at low levels. While labour cost pressures strengthened and broadened amid high levels of capacity utilisation and tightening labour markets, their pass-through to inflation is taking longer than previously anticipated. Over the medium term, underlying inflation is expected to increase, supported by the ECB’s monetary policy measures, the ongoing economic expansion and robust wage growth.

This assessment is also broadly reflected in the September 2019 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.0% in 2020 and 1.5% in 2021. Compared with the June 2019 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down over the whole projection horizon, reflecting lower energy prices and the weaker growth environment. Annual HICP inflation excluding energy and food is expected to be 1.1% in 2019, 1.2% in 2020 and 1.5% in 2021.

The annual growth of broad money increased markedly in July 2019, while loans to the private sector remained broadly unchanged. Broad money (M3) growth increased to 5.2% in July 2019, after 4.5% in June. Sustained rates of broad money growth reflect ongoing bank credit creation for the private sector and low opportunity costs of holding M3. Furthermore, M3 growth remained resilient in the face of the fading out of the mechanical contribution of the net purchases under the asset purchase programme (APP) and weakening economic momentum. At the same time, favourable bank funding and lending conditions continued to support loan flows and thereby economic growth. The annual growth rate of loans to non-financial corporations remained unchanged at 3.9% in July 2019. The monetary policy measures decided by the Governing Council, including the more accommodative terms of the new series of quarterly targeted longer-term refinancing operations (TLTRO III), will help to safeguard favourable bank lending conditions and will continue to support access to financing, in particular for small and medium-sized enterprises.

The aggregate fiscal stance for the euro area is projected to be mildly expansionary, providing some support to economic activity. In the next two years, the stance will continue to be mildly expansionary, mainly on account of further cuts in direct taxes and social security contributions in most of the larger euro area countries. In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies that will create the conditions for automatic stabilisers to operate freely.


Monetary policy decisions

Based on the regular economic and monetary analyses, the Governing Council made the following decisions:

  • First, the interest rate on the deposit facility was decreased by 10 basis points to ‑0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility were kept unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
  • Second, net purchases will be restarted under the APP at a monthly pace of €20 billion as from 1 November. The Governing Council expects the APP to run for as long as necessary to reinforce the accommodative impact of the ECB’s policy rates, and to end shortly before it starts raising the key ECB interest rates.
  • Third, reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
  • Fourth, the Governing Council decided to change the modalities of TLTRO III to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy. The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.
  • Fifth, in order to support the bank-based transmission of monetary policy, the Governing Council decided to introduce a two-tier system for reserve remuneration in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.

The Governing Council took these decisions in response to the continued shortfall of inflation with respect to its aim. With this comprehensive package of monetary policy decisions, the ECB is providing substantial monetary stimulus to ensure that financial conditions remain very favourable and support the euro area expansion, the ongoing build-up of domestic price pressures and, thus, the sustained convergence of inflation to the Governing Council’s medium-term inflation aim. The Governing Council reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time. Looking ahead, it continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.


External environment

Global growth softened in the first half of 2019, reflecting decelerating economic activity in both advanced and emerging economies. This is in line with survey-based indicators which point to subdued global activity. Activity in services, although weakening, continued to support growth while growth momentum in global manufacturing remains subdued. Global growth is projected to decrease this year amid weak global manufacturing activity on the back of declining global investment and rising policy and political uncertainty on account of Brexit and the renewed intensification of trade tensions between the United States and China. While those headwinds are expected to weigh on global activity and trade this year and next, recent policy measures are expected to provide some support. As a result, global growth is projected to stabilise over the medium term, albeit at a level below the average growth rate observed before the crisis. Global trade is expected to weaken significantly this year but recover in the medium term, while remaining more subdued than economic activity. Global inflationary pressures are expected to remain contained, while downside risks to global economic activity have intensified.

Global economic activity and trade

Global growth softened in the first half of 2019. In the first quarter, real GDP growth held up relatively well in most advanced economies owing to temporary factors in some countries (e.g. positive contributions from net trade and a build-up of inventories in the United States and stock-building in advance of the first Brexit deadline in the United Kingdom). In the second quarter, as the impact of such factors unwound, growth moderated. In the United States, as imports stabilised, the negative contribution of net trade weighed on growth in spite of the fiscal stimulus and resilient private consumption. In the United Kingdom, growth turned negative in the second quarter on account of, among other things, a slowdown in investment. While activity in China remained stable in the first half of the year amid resilient private consumption, growth stumbled in several other emerging market economies (EMEs) in the first quarter, reflecting adverse idiosyncratic factors in some countries (a dam disaster in Brazil and contamination of an oil pipeline in Russia) and more persistent headwinds, such as elevated domestic political uncertainty (in Mexico and Brazil). Growth ticked up in the second quarter as some of these headwinds dissipated and economic activity continued to grow in some other countries (e.g. in Turkey, owing to strong private consumption and a positive net trade contribution).

Survey-based indicators continue to point to subdued global activity. The global composite output Purchasing Managers’ Index (PMI) excluding the euro area decelerated further in the second quarter of 2019 and, after a small rebound in July, declined again in August. The deceleration in the first half of the year was broad-based across advanced and emerging economies, though more recently a small uptick has been recorded in the composite PMI indicator for EMEs. Global activity in the services sector, which had been more resilient overall at the turn of the year, also deteriorated in the second quarter and declined still further in August, but remains above the 50 threshold. Global manufacturing activity has been on a declining trend for the past year. After falling into “contraction” territory in June and July (i.e. below the 50 threshold), it rebounded above the neutral mark in August (see Chart 1).

 

Chart 1

Global composite output PMI

(diffusion indices)

48 50 52 54 56 58 2012 2013 2014 2015 2016 2017 2018 2019 Global composite output excluding the euro area Global composite output excluding the euro area long-term average Global manufacturing output excluding the euro area Global services excluding the euro area

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

Global financial conditions have experienced some volatility in recent months. Since the finalisation of the June 2019 Eurosystem staff macroeconomic projections, risky asset prices have experienced some volatility amid conflicting signals. On the one hand, hopes of a bilateral trade deal between the United States and China and the expectation of a more accommodative monetary policy on both sides of the Atlantic led to a rebound in asset prices in June and July. With investors anticipating rate cuts, US Treasury yields and other safe government bond yields moved significantly lower and, at the same time, financial conditions in EMEs eased significantly. On the other hand, the renewed escalation of the US‑China trade dispute in early August and the indication from the Federal Open Market Committee (FOMC) that the July rate cut did not mark the start of an easing cycle sapped risk appetite, causing large losses in global equity markets, while core sovereign bond yields continued to move lower on account of falling term premia. Despite the recent risk-off episode, financial market conditions remain loose in both advanced and emerging economies.

Global growth is projected to decelerate this year. A number of headwinds continue to weigh on the global economy. Global manufacturing activity is expected to remain weak, mainly on the back of declining growth in global investment and consumption of durable goods, which form a large part of manufacturing output. As uncertainty related to the future of international trading relations mounts, global investment growth is unlikely to regain traction. Recent analysis shows that deteriorating financing conditions, rising macroeconomic uncertainty and unfavourable demand shocks weighed negatively on global investment growth in the second half of 2018 and the beginning of 2019.[1] Faced with a slowing global economy, a number of policymakers around the globe have adopted accommodative measures to cushion the negative impact of economic headwinds. In China, fiscal stimulus measures to cushion the slowdown in domestic demand are expected to have an effect mostly in the second half of this year. In the United States, in addition to the sizeable pro-cyclical fiscal stimulus and the recent agreement on new public spending caps, the Federal Reserve System decided to cut its benchmark interest rate with a view to supporting the ongoing economic expansion. A number of other countries have also eased monetary policy (e.g. Australia, Brazil, South Korea, Indonesia, India and Turkey).

Looking ahead, global growth is projected to gradually recover over the medium term but to remain below its long-term average. Developments in global growth are being shaped by three main forces. Across advanced economies, the cyclical momentum is projected to slow as capacity constraints become increasingly binding amid positive output gaps and low unemployment rates across key economies, while, towards the end of the projection horizon, policy support is expected to gradually diminish. In addition, the progressive slowdown of the Chinese economy and its rebalancing from investment to consumption are projected to weigh negatively on global growth and on trade in particular. At the same time, the contribution of EMEs (excluding China) to global growth, while still positive, is expected to be weaker than envisaged in the June 2019 Eurosystem staff macroeconomic projections. This is on account of recent data suggesting that the projected recovery from past recessions is materialising at a slower pace than previously assumed. Moreover, although so far the recent financial market stress in Argentina has not spilled over to other emerging markets, it points to the underlying fragility of the recovery in some EMEs. Overall, the pace of global expansion is expected to settle at rates below those seen prior to the 2007‑08 financial crisis.

Turning to developments in individual countries, in the United States, activity is expected to remain resilient in the near term, despite the headwinds related to the trade dispute with China and the less favourable external environment. The US economy’s performance has so far remained robust, reflecting a strong labour market and consumer spending. The lifting of spending caps for the 2020/21 financial year and a two-year suspension of the federal debt limit agreed by Congress at the end of July will further support economic growth. Financial conditions also remain supportive. Following 3.1% real GDP growth in annual terms in the first quarter of 2019, growth moderated to 2.0% in the second quarter, reflecting the unwinding of temporary factors (e.g. positive contributions from inventories and falling imports), while private consumption and government spending remained supportive of economic activity overall. Annual headline consumer price inflation picked up marginally to 1.8% in July from 1.6% in the previous month, largely on account of core inflation, while energy prices declined. Consumer price inflation excluding food and energy increased slightly, rising to 2.2% in July. Growth is projected to gradually return to the potential growth rate of just below 2%, while consumer price inflation is expected to remain above 2% over the medium term.

The economy in China remains on a gradually slowing trajectory. In the second quarter of 2019 annual GDP growth slowed to 6.2%, from 6.4% in the first quarter, owing to weak final consumption that was only partially compensated for by an improvement in investment. Looking ahead, growth is projected to decelerate further in 2020 and 2021, while no additional fiscal support measures have been announced in response to the latest escalation in the trade dispute. Overall, the deceleration in economic activity reflects the past effects of the deleveraging campaign to contain financial risks, the government’s focus on rebalancing the economy away from investment and the impact of the ongoing trade tensions with the United States. Progress with the implementation of structural reforms is projected to result in an orderly transition to a more moderate growth path that is less dependent on investment and exports.

In Japan, underlying growth momentum remains muted. Growth in the second quarter of 2019 was 0.4% (quarter on quarter), which was better than expected, largely owing to a number of transitory factors, including stronger consumer spending on account of the Golden Week holiday period and higher durable goods purchases. The latter is likely to have partly reflected frontloaded demand ahead of the consumption tax hike scheduled for October 2019. However, exports remained subdued and industrial output and sentiment in the manufacturing sector deteriorated amid weakening external demand and lingering policy uncertainty. Net trade made a negative contribution, with exports remaining flat, while imports rebounded from the weakness observed in the previous quarter. While the near-term profile will be determined by the forthcoming consumption tax hike, implying frontloaded consumption in the third quarter and subsequent payback, economic activity is projected to remain on a moderate trajectory thereafter.

In the United Kingdom, real GDP growth contracted in the second quarter of 2019, largely on account of the uncertainty surrounding Brexit. Real GDP growth has displayed some volatility since the start of the year, largely reflecting changes in activity patterns related to the original 29 March Brexit deadline. After growing by 0.5% (quarter on quarter) in the first quarter, real GDP contracted by 0.2% in the second. This was the first quarter of negative growth since 2012 and reflected lower investment and, following the last-minute extension of the Brexit deadline, a reversal of the strong inventory build-up seen in the first quarter. Despite a marked depreciation in the pound sterling since the start of 2019, exports contracted by 3.3% in the second quarter. The net trade contribution remained nonetheless positive, as imports, particularly of goods from the EU, fell by even more than exports (-12.9% quarter on quarter). Growth in domestic consumption remained robust (0.5% quarter on quarter) in the second quarter, supported in part by stronger real wage growth. Survey-based evidence points to some continued slowing of economic activity in the coming quarter. Annual CPI inflation increased modestly to 2.0% in the second quarter, and further to 2.1% in July, largely on account of the recent stronger adverse exchange rate movements. Ongoing uncertainties related to Brexit modalities have recently been reflected in further volatility in the pound sterling and, on the real economy side, are likely to result in further volatility in quarterly real GDP growth and muted growth over the medium term.

In central and eastern European countries, growth is projected to remain robust over the projection horizon, but more moderate than in 2018. Solid consumer spending backed by strong labour markets is expected to support economic activity going forward. Investment growth is forecast to remain strong, though it will moderate somewhat against the backdrop of a more advanced phase of the EU funds cycle. Furthermore, the slowdown in global trade is weighing on the growth outlook for this region. Over the medium term, the pace of economic expansion in these countries is expected to decelerate further towards potential.

The outlook for economic activity in large commodity-exporting countries points to subdued growth. In Russia, activity in the second quarter was adversely affected by the feed-in of contaminated oil into a key export pipeline, triggering large-scale disruptions along the supply chain. Although temporary, this will weigh on growth in 2019, which has already been affected by an unexpectedly sharp contraction in the first quarter due to weak investment, weak net exports and substantial downward revisions of historical data. Going forward, the outlook for growth in Russia is being shaped by developments in global oil markets, the implementation of fiscal and structural policies, and the international sanctions under which the economy is currently operating. As a result, growth is expected to decelerate somewhat in the medium term. Growth in Brazil is projected to remain subdued, owing to uncertainty surrounding the pension reforms and concerns about fiscal sustainability. Idiosyncratic shocks at the beginning of the year (due to a mining disaster) also weighed negatively on activity. Sluggish domestic demand and persistent uncertainty coupled with substantial spare capacity are holding back a more vigorous investment response and have affected confidence negatively.

In Turkey, economic activity surprised significantly to the upside in the first half of 2019. Following a sharp contraction in the fourth quarter of 2018, the economy recovered in early 2019 on account of a sizeable fiscal stimulus ahead of the local elections in March. The economy continued to grow at a solid pace in the second quarter, despite some unwinding of the fiscal stimulus, owing to strong household consumption and a positive net trade contribution. Investment, on the other hand, continued to contract sharply on account of elevated political uncertainty and tight financing conditions. Looking ahead, growth is expected to weaken for the remainder of 2019 and to gradually accelerate towards the end of the projection horizon.

Global trade weakened significantly in the first half of the year. Global trade growth turned negative in the first quarter and remained weak in the second. The trade weakness is largely explained by slowing industrial activity, heightened trade tensions and, to some extent, a weaker Asian tech cycle.[2] The contraction in global trade was broad-based across countries. In addition to one-off factors (e.g. temporarily weak domestic demand in the United States in view of the partial federal government shutdown in the first quarter and a contraction in UK imports in the second quarter following the stockpiling efforts of the previous quarter), the weakness in trade also stemmed from weak intra-Asian trade. The latter appears to be related to the slowdown in China’s domestic demand in the context of large regional value chain linkages. According to CPB data, the volume of global merchandise imports, excluding the euro area, contracted by 0.6% in June in three-month-on-three-month terms, confirming continued subdued trade momentum in the second quarter (see Chart 2). As survey indicators on new export orders continue to signal a further deterioration, the current weakness in global trade is likely to continue in the near term.

Since August the trade dispute between the United States and China has intensified significantly. In early August, following a bilateral meeting with the Chinese authorities, the United States announced the imposition of 10% tariffs on around USD 300 billion worth of US imports from China. These tariffs are being implemented in two stages, on 1 September and 15 December. Initially, the Chinese authorities announced only in-kind retaliatory measures consisting of the decision to suspend imports of US crops. However, towards the end of August, further retaliatory measures were announced with the decision to impose additional tariffs of 5% or 10% on USD 75 billion worth of Chinese imports from the United States and to reinstate previously suspended tariffs on cars and car parts. This latest move prompted a further escalation as the United States announced the imposition of additional 5% tariffs on all US imports from China (worth around USD 550 billion).[3] This further intensification of the trade dispute between the two countries will weigh negatively on global activity and trade. Meanwhile, other trade issues also remain unresolved. The US administration has delayed taking a decision on possible increases in car tariffs until mid-November 2019, while talks with the EU on a new trade agreement, announced in July 2018, are still ongoing.

 

Chart 2

Surveys and global trade in goods

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

44 46 48 50 52 54 56 58 -3 -2 -1 0 1 2 3 4 2012 2013 2014 2015 2016 2017 2018 2019 Global merchandise imports excluding the euro area (left-hand scale) Average global merchandise imports excluding the euro area, 1991-2018 (left-hand scale) Global PMI, manufacturing output excluding the euro area (right-hand scale) Global PMI, new export orders excluding the euro area (right-hand scale)

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

Global economic growth is projected to weaken this year, and to recover only gradually over the medium term. According to the September 2019 ECB staff macroeconomic projections, global real GDP growth (excluding the euro area) is projected to decelerate to 3.1% this year, from 3.8% in 2018. This reflects increasing headwinds to global growth in an environment of high and rising political and policy uncertainty. Over the period 2020‑21 growth in world economic activity is projected to stabilise at 3.5%, as the (cyclical) slowdown in key advanced economies and China’s transition to a more moderate growth path are expected to be only partly counterbalanced by a gradual recovery in several key EMEs. As the growth headwinds weigh more significantly on trade-intensive demand components, such as investment, growth in euro area foreign demand is projected to slow more significantly than global activity this year, falling to 1.0%, from 3.7% in 2018. Global imports are projected to increase gradually over the medium term. Compared with the June 2019 Eurosystem staff macroeconomic projections, both global GDP growth and growth in euro area foreign demand have been revised downwards over the forecast horizon. From a geographical perspective, the revisions of euro area foreign demand reflect weaker than expected trade prospects for EMEs, including China to a lesser extent, as well as the outlook of slower import growth across some key trading partners, including the United Kingdom and other European countries outside the euro area.

Downside risks to global activity have intensified lately. A further escalation of trade disputes would pose a risk to global trade and growth. Moreover, a “no deal” Brexit scenario could have more adverse spillover effects, especially in Europe. A sharper slowdown in China’s economy could be harder to counteract with efficient policy stimuli and might prove a challenge to the ongoing rebalancing process in China. Repricing in financial markets might weigh significantly on vulnerable EMEs. A further escalation of geopolitical tensions could also adversely affect global activity and trade.


Global price developments

Developments in oil prices since late July have mainly been shaped by concerns about the global outlook. Following the re-escalation of US‑China trade tensions in early August, oil prices first declined by around 5%, before making up some ground in the second half of the month. Since April, the outlook for global oil consumption has been revised down repeatedly. Accordingly, production cuts by the OPEC+ group of oil producers, which supported oil prices in the first quarter of the year in particular, have not been sufficient to offset headwinds from concerns about demand for oil. The impact on prices of recent geopolitical uncertainties in the Middle East has also been limited so far. Going forward, risks to oil prices appear broadly balanced. While further weakness in global activity would weigh on prices, restrictions to supply would bolster them. Indeed, Saudi Arabia and Russia have already indicated the possibility of further OPEC+ production cuts in the near future, which could put some renewed upward pressure on prices.

In the September 2019 ECB staff macroeconomic projections, oil prices are foreseen to decline over the projection horizon. Amid short-term volatility, concerns about demand for oil and the re-intensification of trade tensions have been a drag on oil prices, despite the agreement between OPEC and other major oil producers to curb production. Consequently, the oil price assumptions underpinning the September 2019 ECB staff macroeconomic projections were around 8.3% lower for 2019 (and 13.4% and 10.3% lower for 2020 and 2021 respectively) relative to the assumptions underpinning the June 2019 Eurosystem staff macroeconomic projections. Since the cut-off date for the September projections, however, the price of oil has increased marginally, with Brent crude standing at USD 61 per barrel on 5 September.

Global inflationary pressures remain moderate. In countries belonging to the Organisation for Economic Co-operation and Development (OECD), annual headline consumer price inflation averaged 2.1% in July 2019, up from 2.0% in the previous month. The increase is due to a positive contribution from core inflation (excluding food and energy) (see Chart 3), which picked up to 2.3% from 2.2% in the previous month, while energy inflation remained flat. Tight labour market conditions across the major advanced economies have so far translated into only moderate wage increases, suggesting that the underlying inflation pressures remain subdued. Nevertheless, they should recover gradually over the projection horizon, reflecting diminishing slack.

 

Chart 3

OECD consumer price inflation

(year-on-year percentage changes; percentage point contributions)

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2012 2013 2014 2015 2016 2017 2018 2019 Energy contribution Food contribution Contribution of all components except food and energy Inflation excluding food and energy Inflation including all components

Sources: OECD and ECB calculations.
Note: The latest observations are for July 2019.

Looking ahead, global inflationary pressures are expected to remain contained. Growth in the export prices of the euro area’s competitors is expected to weaken sharply this year and gradually decelerate over the medium term. This reflects the impact of a downward sloping oil price futures curve, which is expected to outweigh the upward pressure arising from gradually diminishing global spare capacity.


Financial developments

Since the Governing Council’s meeting in June 2019, global long-term risk-free rates have declined amid market expectations of further accommodative monetary policy in an environment of heightened global trade uncertainty. This decline in risk-free rates has supported the prices of euro area equities and corporate bonds. Meanwhile, corporate earnings expectations have fallen somewhat in response to persistent doubts about the global macroeconomic outlook. In foreign exchange markets, the euro remained broadly unchanged in trade-weighted terms.

Long-term yields in both the euro area and the United States declined materially. During the period under review (6 June to 11 September 2019), the GDP-weighted euro area ten-year sovereign bond yield fell by 55 basis points to ‑0.06% (see Chart 4). Ten-year sovereign bond yields in the United States and the United Kingdom also dropped significantly, by 38 and 19 basis points respectively. The sizeable falls in government bond yields partly reflect a reappraisal of interest rate expectations in major jurisdictions in the context of heightened uncertainty with regard to global trade relations and the broader macroeconomic outlook.

 

Chart 4

Ten-year sovereign bond yields

(percentages per annum)