Economic and monetary developments
Based on the assessment of the economic and inflation outlook for the euro area, also taking into account the latest Eurosystem staff macroeconomic projections, the Governing Council decided at its monetary policy meeting on 12 December to keep the key ECB interest rates unchanged and to reiterate its forward guidance on policy rates, net asset purchases and reinvestments. Incoming information since the last Governing Council meeting in late October points to continued muted inflation pressures and weak euro area growth dynamics, although there are some initial signs of stabilisation in the growth slowdown and of a mild increase in underlying inflation in line with previous expectations. Ongoing employment growth and increasing wages continue to underpin the resilience of the euro area economy. Against this overall background and in the light of the subdued inflation outlook, the Governing Council reiterated the need for monetary policy to remain highly accommodative for a prolonged period of time to support underlying inflation pressures and headline inflation developments over the medium term. In addition, the Governing Council’s forward guidance ensures that financial conditions adjust in accordance with changes to the inflation outlook. In any event, the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aims in a sustained manner, in line with its commitment to symmetry.
Economic and monetary assessment at the time of the Governing Council meeting of 12 December 2019
Global real GDP growth (excluding the euro area) weakened during the first half of 2019, but signs of stabilisation started to emerge towards the end of the year. The weak growth momentum was characterised by slowing growth in both manufacturing and investment, which have been reinforced by rising policy and political uncertainty particularly amid escalating trade tensions and Brexit-related developments. More recent information, however, points to a stabilisation in global growth, as confirmed also by survey-based data. In particular, the Purchasing Managers’ Indices (PMI) point to a moderate recovery in manufacturing output growth and some moderation in services output growth. Looking ahead, the recovery in global economic activity is projected to be shallow, reflecting a moderation of growth in advanced economies and a sluggish recovery in some emerging economies. Global trade softened this year and is projected to expand at a slower pace than global activity in the medium term. Global inflationary pressures remain contained, and the balance of risks to global economic activity continues to be tilted to the downside, although risks are becoming less pronounced.
Since the Governing Council meeting in September 2019 euro area long-term risk-free rates have increased and the forward curve of the euro overnight index average (EONIA) has shifted upwards, with markets currently expecting no further cut in the deposit facility rate. In line with an improvement in global risk sentiment, euro area equity prices have increased and corporate spreads have tightened. Euro area long-term sovereign yields also largely reflect the rise in risk-free rates. In foreign exchange markets, the euro remained broadly stable in trade-weighted terms.
Euro area real GDP growth was confirmed at 0.2%, quarter on quarter, in the third quarter of 2019, unchanged from the previous quarter. The ongoing weakness of international trade in an environment of persistent global uncertainties continues to weigh on the euro area manufacturing sector and is dampening investment growth. At the same time, incoming economic data and survey information, while remaining weak overall, point to some stabilisation in the slowdown of economic growth in the euro area. The services and construction sectors remain resilient, despite some moderation in the latter half of 2019. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains in conjunction with 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 December 2019 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.2% in 2019, 1.1% in 2020 and 1.4% in both 2021 and 2022. Compared with the September 2019 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised down slightly for 2020. The risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become somewhat less pronounced.
According to Eurostat’s flash estimate, euro area annual HICP inflation increased from 0.7% in October 2019 to 1.0% in November, reflecting mainly higher services and food price inflation. On the basis of current futures prices for oil, headline inflation is likely to rise somewhat in the coming months. Indicators of inflation expectations stand at low levels. Measures of underlying inflation have remained generally muted, although there are some indications of a mild increase in line with previous expectations. While labour cost pressures have strengthened amid tighter labour markets, the weaker growth momentum is delaying their pass-through to inflation. Over the medium term, inflation is expected to increase, supported by the Governing Council’s monetary policy measures, the ongoing economic expansion and solid wage growth.
This assessment is also broadly reflected in the December 2019 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.1% in 2020, 1.4% in 2021 and 1.6% in 2022. Compared with the September 2019 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised up slightly for 2020 and down slightly for 2021, mainly driven by the expected future path of energy prices. Annual HICP inflation excluding energy and food is expected to be 1.0% in 2019, 1.3% in 2020, 1.4% in 2021 and 1.6% in 2022.
In October 2019 the annual growth of broad money remained robust, while lending to the private sector continued its gradual recovery. Broad money (M3) growth stood at 5.6% in October 2019, unchanged from the previous month. Sustained rates of broad money growth reflect ongoing bank credit creation for the private sector and low opportunity costs of holding M3. 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 increased to 3.8% in October, up from 3.6% in September. The Governing Council’s accommodative monetary policy stance will help to safeguard very favourable bank lending conditions and will continue to support access to financing, across all economic sectors and in particular for small and medium-sized enterprises.
The aggregate fiscal stance for the euro area is expected to remain mildly expansionary in 2020, thus providing support to economic activity. The stance is expected to remain expansionary in 2021 and to stabilise in 2022, mainly on account of a declining but still positive primary balance. In view of the weakening economic outlook, governments with fiscal space should be ready to act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies and meet structural balance targets, which will create the conditions for automatic stabilisers to operate freely. All countries should intensify their efforts to achieve a more growth-friendly composition of public finances.
Monetary policy decisions
Based on the regular economic and monetary analyses, the Governing Council decided at its monetary policy meeting on 12 December to keep the key ECB interest rates unchanged and to reiterate its forward guidance on policy rates, net asset purchases and reinvestments:
- First, the Governing Council 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, after restarting net purchases under the ECB’s asset purchase programme (APP) at a monthly pace of €20 billion on 1 November, the Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of the key ECB interest rates, and to end shortly before it starts raising those rates.
- Third, the Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it 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.
The comprehensive package of policy measures that the Governing Council decided in September provides substantial monetary stimulus, which ensures favourable financing conditions for all sectors of the economy. In particular, easier borrowing conditions for firms and households are underpinning consumer spending and business investment. This will support the euro area expansion, the ongoing build-up of domestic price pressures and, thus, the robust convergence of inflation to the Governing Council’s medium-term aim. Looking ahead, the Governing Council will closely monitor inflation developments and the impact of the unfolding monetary policy measures on the economy. The Governing Council 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.
While global real GDP growth (excluding the euro area) weakened during the first half of 2019, the latest available data point to a stabilisation in the second half. The weak growth momentum was characterised by slowing growth in both manufacturing and investment, which have been reinforced by rising policy and political uncertainty particularly amid escalating trade tensions and Brexit-related developments. More recent data, however, point to a stabilisation in global growth in the third quarter, as also confirmed by recent survey-based data. In particular, the Purchasing Managers’ Indices (PMI) point to a moderate recovery in manufacturing output growth and some moderation in services output growth. Looking ahead, the recovery in global economic activity is projected to be shallow, reflecting a moderation of growth in advanced economies and a sluggish recovery in emerging economies. Global trade softened this year and is projected to expand at a slower pace than global activity in the medium term. Global inflationary pressures remain contained, while the balance of risks to global economic activity, although less pronounced, remains tilted to the downside.
Global economic activity and trade
While global growth (excluding the euro area) weakened during the first half of the year, signs of stabilisation started to emerge towards the year-end. After having peaked in mid‑2018, global growth entered a period of weakness which continued into the first half of 2019, marking the weakest period of growth momentum since the global financial crisis. The slowdown has been characterised by weakness in both global manufacturing activity and investment, exacerbated by increasing policy uncertainty amid recurring escalations of trade tensions and Brexit-related developments. Recent data, however, point to a stabilisation in global activity, though at low levels. Real GDP continued to expand steadily in the United States and Japan, while real activity growth rebounded in the United Kingdom. In the United States, in the third quarter, a strong labour market and consumer spending, and favourable financial conditions remained supportive of growth, while in Japan solid domestic demand was the main engine of growth. In the United Kingdom, growth rebounded on the back of unexpectedly strong net export growth, and solid growth in private consumption. In China, third quarter data confirmed the gradual slowdown in activity, driven by slowing investment, while growth has stabilised across other EMEs.
Survey-based indicators suggest that the stabilisation of global activity has continued in the fourth quarter. The global composite output Purchasing Managers’ Index (PMI) excluding the euro area was unchanged in the third quarter compared to the previous quarter, pointing to a stabilisation in global activity. Available data for October and November confirm steady, albeit subdued, global GDP growth (excluding the euro area) in the fourth quarter. At a sectoral level, since July/August the gap between the manufacturing and services output PMIs at the global level has progressively narrowed, pointing to a gradual recovery in manufacturing output growth and some moderation in services output growth.
Global composite output PMI (excluding the euro area)
Sources: Markit and ECB calculations.
Notes: The latest observations are for November 2019. “Long-term average” refers to the period from January 1999 to November 2019. The indices reported in the chart refer to the global aggregate excluding the euro area.
Global financial conditions have eased further. Since the finalisation of the September 2019 ECB staff macroeconomic projections, financial conditions have eased in both advanced and emerging economies. In emerging markets, the improvement in financial conditions is mainly accounted for by the fall in bond yields and the compression of spreads. Advanced economies, on the other hand, have benefited from higher stock valuations (in particular in the United States and the United Kingdom) and the tightening of corporate spreads. An easing of trade tensions, lower Brexit-related uncertainty and further monetary accommodation have contributed to these developments.
Looking ahead, only a mild pick-up in global growth is projected, reflecting a deceleration of growth in advanced economies and China, which is offset by a moderate recovery in EMEs. Developments in global growth are shaped by three main forces. A slowing cyclical momentum in most advanced economies and the gradual transition of China to a lower growth path will weigh on global growth. Conversely, a favourable base effect due to a stabilisation of activity in those EMEs that experienced a (severe) recession will contribute to the recovery. Compared to the September 2019 macroeconomic projection exercise, the global growth outlook is revised down over the projection horizon, reflecting a less dynamic than previously expected recovery in some EMEs, including in the light of domestic instability in some of them (e.g. Hong Kong and Chile).
Economic activity is expected to remain resilient in the United States in the near term, and to decelerate in the medium term. Activity expanded at 2.1% in annualised terms in the third quarter of 2019, broadly unchanged from the second quarter. A strong labour market, resilient consumer spending and supportive financial conditions remained the main drivers of growth, while non-residential investment continued to contract. The net trade contribution was neutral, with both imports and exports growing modestly. Annual headline consumer price inflation picked up marginally to 1.8% in October, from 1.7% in the previous month, largely on account of food and energy prices. Consumer price inflation excluding food and energy fell slightly in October to 2.3%. Over the medium term, growth is projected to gradually return to the potential growth rate of just below 2%, reflecting a maturing economic cycle and increasingly binding capacity constraints, while consumer price inflation is expected to remain above 2%.
In China, economic activity remains on a gradually slowing trajectory. In the third quarter of 2019 annual GDP growth slowed to 6.0% from 6.2% in the second quarter, driven by less supportive net trade. Investment surprised on the downside and is expected to remain weak, while the trade conflict with the United States continues to weigh on trade. Looking ahead, growth is projected to decrease further in 2020, reflecting slower exports and weak investment, and to marginally pick up in 2021 and 2022, supported by policy actions. Overall, the deceleration in economic activity reflects the past deleveraging efforts aimed at containing 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. 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.
Economic activity remains muted in Japan and is projected to grow moderately over the medium term. Real GDP grew by 0.4% in the third quarter of 2019 (quarter on quarter), compared to 0.5% in the previous quarter. Solid domestic demand, supported by firms’ private non-residential investment and frontloaded spending ahead of the 1 October value-added tax hike, was partially offset by weak exports and inventory adjustments as well as some payback for the relatively strong outcome in the second quarter (partly as a result of the extended holiday period to celebrate the Imperial succession). While growth is projected to temporarily weaken following the value-added tax hike and the natural disasters in October, activity is expected to gradually return to a moderate growth path as Japan continues to benefit from a highly accommodative monetary policy, robust labour market conditions and the preparations for the Tokyo 2020 Olympics. The recent announcement of a significant fiscal stimulus package by the Japanese government – still to be approved by parliament – is also likely to provide support to growth further ahead. At the same time, a maturing business cycle, amid increasingly binding labour and capacity constraints, is expected to limit the pace of growth.
Real GDP growth recovered modestly in the third quarter in the United Kingdom, but the outlook remains subdued, despite a reduced risk of a disorderly Brexit. After contracting in the second quarter (-0.2% quarter on quarter), real GDP expanded by 0.3% in the third, boosted by unexpectedly strong net export growth. Growth in private consumption remained solid (0.4% quarter on quarter), reflecting stronger real wage growth over the course of 2019, with further support from government consumption (0.3% quarter on quarter), while investment and inventories continued to be a drag on growth. Brexit-related uncertainty remained high, constraining growth over the short term. Longer-term growth prospects remain heavily dependent on the nature of the eventual post-Brexit trading arrangements still to be agreed between the United Kingdom and the EU. Inflation declined strongly at the start of the fourth quarter, with UK annual CPI inflation falling to 1.5% in October, down from 1.8% in the third quarter. The fall reflects the impact of lower sterling-denominated oil prices compared with last year, lower import prices owing to the appreciation of the pound sterling since September, and a strong downward impact on domestic energy prices as a result of the decrease in the regulator’s energy price cap, which is likely to be reversed in the spring of 2020.
Real GDP growth is projected to remain buoyant in central and eastern European countries over the projection horizon. Economic activity continues to be supported by solid consumer spending, underpinned by tight labour markets, while investment is forecast to soften against the backdrop of a more advanced phase of the EU funds cycle. Over the projection horizon, growth is expected to moderate from above-potential rates, albeit remaining robust.
Economic activity in large commodity-exporting countries is projected to rebound modestly from the weakness experienced in the course of 2019. In Russia, the feed-in of contaminated oil into a key export pipeline led to large-scale disruptions, but a quicker than anticipated restoration of output resulted in better than expected GDP and export outcomes in the third quarter of 2019. Going forward, the medium-term outlook will be shaped primarily by fiscal and structural policy implementation, global oil market developments, specifically the commitment by the OPEC+ group of major oil producers to sustain oil production cuts, and the scope of the international sanctions regime under which Russia will be operating. In Brazil, despite some improvements since early 2019, growth remains fragile owing to a tight fiscal situation (including budget freezes), an uncertain external environment (e.g. trade tensions and crises in Argentina and other Latin American countries) and idiosyncratic shocks (e.g. a dam collapse in the country). While the recently approved pension reform was critical in boosting confidence, the degree to which additional necessary fiscal reforms are implemented will significantly influence growth in the medium-to-long term.
In Turkey, growth is projected to remain mildly positive in 2019, before gradually recovering in the medium term. Following the sharp contraction in GDP in the second half of 2018, the economy rebounded in the first half of 2019 owing to fiscal stimulus ahead of the local elections in March, stronger household consumption and net exports, while investment continued to contract. Growth is expected to remain mildly positive in 2019, assuming continued resilience in household consumption, while the external environment could be somewhat less supportive. Economic activity is expected to gradually accelerate towards the end of the projection horizon.
Global trade has declined significantly in the course of 2019 amid recurring escalations of trade tensions and slowing industrial activity. After contracting in the first half of 2019, the latest available data point to a stabilisation in global trade for the rest of the year, though at very subdued levels. Across advanced economies, trade returned to moderate growth in the third and fourth quarters of 2019, supported by a normalisation of imports in the United Kingdom (after the exceptional stock building at the start of 2019) and a pick-up in imports in central and eastern European EU countries, following a temporary slowdown in the second quarter. Across EMEs, trade continued to contract in the third quarter owing to trade headwinds in China, the economic slowdown in India and political turbulence in Latin America, but there are signs of stabilisation in the fourth quarter. According to CPB data, global merchandise imports (excluding the euro area) increased by 0.8% in the third quarter of 2019, relative to the second quarter, after three consecutive quarters of contraction and despite the sharp monthly fall in September (see Chart 2). As survey indicators on new export orders continue to remain in contractionary territory, despite some mild pick-up, the current weakness in global trade is likely to continue in the near term.
Surveys and global trade in goods (excluding the euro area)
(left-hand scale: three-month-on-three-month percentage changes; right-hand scale: diffusion indices)
Sources: Markit, CPB Netherlands Bureau for Economic Policy Analysis and ECB calculations.
Note: The latest observations are for November 2019 for the PMIs and September 2019 for global merchandise imports. The indices and data refer to the global aggregate excluding the euro area.
Recent developments in the US trade policy stance provide mixed signals about a potential dissipation of trade tensions. The resumption of the US‑China bilateral trade negotiations in early October paved the way for a “Phase 1” trade deal, triggering hopes of some de-escalation of the trade conflict. However, at the cut-off date for this commentary, trade talks continued amid political skirmishes between the two countries and it remained unclear by when a trade deal could be signed. In view of this progress, the United States has delayed indefinitely its 15 October tariff hike. Furthermore, a US decision on whether to impose tariffs on EU car (and car part) imports (initially due by mid-November) has been postponed. However, trade tensions have recently escalated vis-à-vis other countries. In early December the US administration threatened to reinstate tariffs on imports of steel and aluminium from Argentina and Brazil in response to their currency policies. At the same time, following the conclusion of an investigation initiated by the US Trade Representative into the Digital Services Tax enacted by France in 2019, the United States has threatened to impose tariffs on selected imports of French products, as this tax was found to be discriminating against US companies. While the overall volume of trade potentially affected by these tariffs is not large, these recent escalations do not bode well for a potential dissipation of trade tensions.
Global imports are projected to increase gradually over the medium term, and to expand at a more subdued pace than global activity. The further escalation of trade tensions, the effects of which will continue to be felt into 2020, coupled with a more gradual than previously projected recovery in emerging economies and the structural rebalancing of the Chinese economy, will contribute to a delay in the recovery in trade. As a result, the elasticity of trade to economic activity is projected to remain below the unit value over the projection horizon. According to the December 2019 Eurosystem staff macroeconomic projections, global imports (excluding the euro area) are expected to decelerate markedly from 4.6% growth in 2018 to zero growth in 2019, before recovering to 0.8% in 2020, 2.4% in 2021 and 2.7% in 2022. Euro area foreign demand, which expanded by 3.7% last year, is expected to slow down to 0.7% in 2019, before increasing gradually to 1.0% in 2020, 2.3% in 2021 and 2.6% in 2022. Compared to the September 2019 ECB staff macroeconomic projections, euro area foreign demand has been revised down by 0.3 percentage points in 2019, 0.9 percentage points in 2020 and 0.4 percentage points in 2021. In addition to the impact of the tariffs announced at the end of August and weaker data outturns, these revisions also reflect a broad-based weakness in import momentum across both advanced and emerging economies on the back of a subdued growth outlook.
The balance of risks to global activity remains tilted to the downside, but risks have become somewhat less pronounced. A further escalation of trade disputes would be detrimental to global trade and growth and cause disruptions to global supply chains. 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 effective policy stimuli and might prove a challenge to the ongoing rebalancing process in China. Repricing in financial markets might dent risk appetite globally, while a further escalation of geopolitical tensions could also adversely affect global activity and trade. Upside risks concern a swifter recovery in global trade and a more benign resolution of current political uncertainties.
Global price developments
Oil prices have increased amid improving market sentiment. Concerns about weak global oil demand remained a predominant market force until mid-October when US‑China trade talks resumed. Since then oil prices have recovered on the back of more buoyant market sentiment, and have been further supported by the agreement by OPEC+ on 6 December to implement more substantial production cuts.
In the December 2019 Eurosystem staff macroeconomic projections, oil prices are foreseen to decline over the projection horizon. Owing to the increase in spot prices, the oil futures curve has moved slightly above the one in the September 2019 ECB staff macroeconomic projections, while the slope is broadly unchanged. Consequently, the oil price assumptions underpinning the December 2019 Eurosystem staff macroeconomic projections were around 2.1%, 4.6% and 2.1% higher for 2019, 2020 and 2021, respectively, than the assumptions underpinning the September 2019 ECB staff macroeconomic projections. Since the cut-off date for the December projections, the price of oil has increased further, with Brent crude standing at USD 65.2 per barrel on 11 December.
Global inflationary pressures remain muted. In countries belonging to the Organisation for Economic Co-operation and Development (OECD), annual headline consumer price inflation was 1.6% in October 2019, unchanged from the previous month. Energy prices continued to be a drag on headline inflation (falling further to ‑3.0% from ‑2.7% in September), while food price inflation picked up marginally, thereby offsetting the fall in energy prices. Annual CPI inflation excluding food and energy decreased slightly to 2.0% from 2.1% in September (see Chart 3). Inflationary pressures remain muted across major advanced economies, despite the easing stance of monetary policy and tight labour market conditions, which are failing to fully pass through to wage increases. Overall, this suggests that underlying inflationary pressures are likely to remain subdued for the foreseeable future.
OECD consumer price inflation
(year-on-year percentage changes; percentage point contributions)
Sources: OECD and ECB calculations.
Note: The latest observations are for October 2019.
Looking ahead, global inflationary pressures are expected to remain contained. Growth in the euro area’s competitors’ export prices (in national currency) is expected to broadly stabilise over the medium term, as the contribution from a downward sloping oil price futures curve is expected to be broadly offset by the depreciation of the euro over the projection horizon.
Since the Governing Council’s meeting in September 2019 euro area long-term risk-free rates have increased and the forward curve of the euro overnight index average (EONIA) has shifted upwards, with markets currently expecting no further cut in the deposit facility rate. In line with some improvement in global risk sentiment, euro area equity prices have increased and corporate spreads have tightened. As euro area sovereign yields have largely reflected the rise in risk-free rates, sovereign spreads have shown little change; only Italy’s spread has risen significantly, mainly on account of domestic political tensions. In foreign exchange markets, the euro has remained broadly stable in trade-weighted terms.
Long-term sovereign yields have increased across the euro area, indicating a turnaround of the downward trend seen from late 2018 until August 2019 (see Chart 4). During the period under review (12 September to 11 December 2019) the GDP-weighted euro area ten-year sovereign bond yield increased by 25 basis points to 0.20% as risk-free rates rose amid an improvement in risk sentiment and a tentative stabilisation of the macroeconomic outlook. The ten-year sovereign bond yield in the United Kingdom also increased over the review period, to around 0.78%, while the equivalent yield in the United States remained roughly unchanged at 1.79%.
Ten-year sovereign bond yields
(percentages per annum)