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Update on economic and monetary developments


Incoming information since the last Governing Council meeting in early December is in line with the Governing Council’s baseline scenario of ongoing, but moderate, growth of the euro area economy. In particular, the weakness in the manufacturing sector remains a drag on euro area growth momentum. At the same time, ongoing, albeit decelerating, employment growth and increasing wages continue to support the resilience of the euro area economy. 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 less pronounced as some of the uncertainty surrounding international trade is receding. While inflation developments remain subdued overall, there are some signs of a moderate increase in underlying inflation in line with expectations. Against this background, the Governing Council kept its monetary policy stance unchanged at its meeting on 23 January 2020. The unfolding monetary policy measures are underpinning favourable financing conditions for all sectors of the economy. In particular, easier borrowing conditions for firms and households are supporting consumer spending and business investment. This will sustain the euro area expansion, the build-up of domestic price pressures and, thus, the robust convergence of inflation to the Governing Council’s medium-term aim.

Global economic activity remains moderate, but there are signs of stabilisation. In particular, the global manufacturing sector firmed in the last quarter of 2019, while the services sector remained broadly stable. Global trade remains weak amid signs of stabilisation. A preliminary trade deal between China and the United States has led to an easing of trade tensions, which should contribute to removing impediments to trade growth. Looking ahead, global inflationary pressures are expected to remain contained, while the balance of risks to global economic activity, although less pronounced, remains tilted to the downside.

Since the Governing Council meeting in December 2019, movements in euro area financial markets have been limited, with asset prices continuing to be supported by accommodative monetary policy and improved risk sentiment as trade tensions have further receded. Long-term risk-free rates are broadly unchanged and the EONIA forward curve has shifted slightly upwards, continuing to signal market expectations of an unchanged deposit facility rate in the coming months. Sovereign spreads have remained broadly stable over this period. Equity prices have increased amid lower risk premia, and corporate bond spreads have decreased slightly. In foreign exchange markets, the euro has weakened slightly in trade-weighted terms.

Euro area real GDP increased by 0.3%, quarter on quarter, in the third quarter of 2019, following growth of 0.2% in the second quarter. This pattern of moderate growth reflects the ongoing weakness of international trade in an environment of continued global uncertainties, which has particularly affected the euro area manufacturing sector and has also dampened investment growth. At the same time, the services and construction sectors remain more resilient, despite some moderation in the latter half of 2019. Incoming economic data and survey information point to some stabilisation in euro area growth dynamics, with near-term growth expected to be similar to rates observed in previous quarters. 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.

Euro area annual HICP inflation increased to 1.3% in December 2019, from 1.0% in November, reflecting mainly higher energy price inflation. On the basis of current futures prices for oil, headline inflation is likely to hover around current levels in the coming months. While indicators of inflation expectations remain at low levels, recently they have either stabilised or ticked up slightly. Measures of underlying inflation have remained generally muted, although there are further indications of a moderate 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 ECB’s monetary policy measures, the ongoing economic expansion and solid wage growth.

Regarding monetary developments, broad money (M3) growth stood at 5.6% in November 2019, broadly unchanged since August. M3 growth continues to be backed up by bank credit creation and the narrow monetary aggregate M1 remained the main contributor to broad money growth. The growth of loans to firms and households remained solid, benefiting from the ongoing support provided by the ECB’s accommodative monetary policy stance, which is reflected in very low bank lending rates. While the annual growth rate of loans to households remained unchanged from October, at 3.5% in November, the annual growth rate of loans to non-financial corporations moderated to 3.4%, from 3.8% in October, likely reflecting some lagged reaction to the past weakening in the economy. However, credit standards for both loans to firms and loans to households for house purchase remained broadly unchanged, pointing to still favourable credit supply conditions. The Governing Council’s accommodative monetary policy stance will help to safeguard 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.

Combining the outcome of the economic analysis with the signals coming from the monetary analysis, the Governing Council confirmed that an ample degree of monetary accommodation is still necessary for the continued robust convergence of inflation to levels that are below, but close to, 2% over the medium term.

On the basis of this assessment, the Governing Council decided to keep the key ECB interest rates unchanged and expects them 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.

The Governing Council confirmed that it will continue to make net purchases under the ECB’s asset purchase programme (APP) at a monthly pace of €20 billion. It expects them to run for as long as necessary to reinforce the accommodative impact of the ECB policy rates, and to end shortly before the Governing Council starts raising the key ECB interest rates.

The Governing Council also 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.

In the light of the continued subdued inflation outlook, the Governing Council reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time to support underlying inflation pressures and headline inflation developments over the medium term. The Governing Council’s forward guidance will ensure that financial conditions adjust in accordance with changes to the inflation outlook. In any case, 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.

The Governing Council also decided to launch a review of the ECB’s monetary policy strategy. The review will encompass the quantitative formulation of price stability, the monetary policy toolkit, the economic and monetary analyses and communication practices. Other considerations, such as financial stability, employment and environmental sustainability, will also be part of the review, which is expected to be concluded by the end of 2020. The review will be based on thorough analysis and open minds. Accordingly, the Eurosystem will engage with all stakeholders.

External environment

The outlook for global economic activity (excluding the euro area) remains subdued but has been showing signs of stabilisation. The global composite output Purchasing Managers’ Index (PMI) excluding the euro area increased moderately in December. The manufacturing component in particular recovered in the fourth quarter, signalling a firming of global manufacturing activity, which had gradually weakened since early 2018. The services sector remained resilient and grew further in December (see Chart 1).


Chart 1

Global output PMI (excluding the euro area)

(diffusion indices)

Sources: Markit and ECB calculations.
Notes: The latest observations are for December 2019.

Risks to the global outlook remain elevated but are less skewed to the downside. The partial US‑China trade agreement represents a welcome easing of trade tensions. The so-called “Phase 1” deal includes a commitment from China to purchase a substantial amount of a broad range of US agricultural and other goods and services, which may affect demand for EU exports to China. It also aims to bring about changes in areas ranging from exchange rate policy to intellectual property protection and technology transfer. The US Trade Representative has clarified that certain existing tariffs will be reduced – including the September 2019 tariffs, which will be halved – and that the planned December 2019 tariffs will be postponed indefinitely. Moreover, China has dropped duties that were to come into effect alongside the US tariffs previously scheduled for December and will continue to hold back from introducing retaliatory tariffs on US-made automobiles and auto parts.

Financial conditions continued to loosen on the back of easing trade tensions. Financial conditions remain very loose by historical standards. In advanced economies this dynamic is partly related to the exceptional response by central banks to the Great Recession of 2007‑09 and the relatively weak global economic performance in recent years. In emerging markets, financial conditions also remain accommodative but have not eased to the same extent on account of the current broad-based strength of the US dollar. Looking ahead, in 2020 financial conditions will benefit from anchored inflation rate expectations, firms’ expectations of earnings growth in the United States and other major economies, and a possible further easing of trade tensions.

The global trade momentum remains weak, albeit amid signs of stabilisation. Global merchandise imports continued to increase moderately in October, while the global PMI for new export orders excluding the euro area continued to recover in December. For the fourth quarter as a whole, the global PMI for new export orders increased significantly relative to the third quarter, with the index nearing the neutral threshold (see Chart 2). The recent easing of trade tensions further serves to remove impediments to global trade activity. In line with this outlook, high frequency trade data are, on balance, consistent with low but positive growth in world trade.


Chart 2

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 October 2019 for global merchandise imports and December 2019 for the PMIs.

Global inflation rose further in November. Annual consumer price inflation in the countries of the Organisation for Economic Co-operation and Development (OECD) increased to 1.8% in November, driven in part by high food price inflation in selected emerging market economies, including China and India. Meanwhile, inflation excluding energy and food increased only marginally to 2.1% in November, from 2.0% in the previous month. Looking ahead, global inflationary pressures are expected to remain contained. Wage growth in advanced economies continues to be moderate despite a tightening of labour markets and rising capacity constraints.

Oil markets have remained broadly stable. Oil prices were supported only temporarily by the OPEC+ group of major oil producers, who extended their production cuts in early December. Prices spiked at around USD 70 per barrel in early January, following a rise in tensions in the Middle East, but fell back quickly after tensions eased. With high levels of inventories and US shale oil production, together with the International Energy Agency projecting global oil demand to slow in the first quarter of 2020, oil markets are expected to remain well supplied despite the recent OPEC+ agreement. Total non-oil prices increased slightly (+1.7%) as both metal prices (+1.2%) and food prices rose (+2.8%).

Economic growth in the United States remained moderate in the third quarter of 2019. Annualised US real GDP growth stood at 2.1%. Despite the modest pick-up in activity from second quarter growth of 2.0%, economic activity moderated as a result of weak investment, the fading effect of the 2018 tax reform and the maturing business cycle. Risks to the outlook have eased somewhat but are still tilted to the downside. While trade tensions with China have eased, the recent announcement by Boeing to halt, indefinitely, the production of its 737 MAX in January represents a new risk. The net impact on the economy so far has been modest, as a decline in deliveries has been offset by accumulating inventories. Looking ahead, however, weakness in the manufacturing sector is likely to persist. Apart from the issues at Boeing, prolonged trade uncertainties, subdued global growth and the broad-based appreciation of the US dollar in recent years continue to weigh on the economy.

In Japan, the government has prepared a stimulus package to support economic growth. In early December, the government of Prime Minister Abe announced a fiscal package to tackle downside risks to activity stemming from a weak external environment and recent natural disasters. Under the package, fiscal spending amounts to 2.4% of GDP, which puts it among the largest fiscal stimulus packages enacted under “Abenomics”. The package will largely be implemented in 2020‑21. It should be noted that the impact of the package on the economy partially offsets the recent increase in VAT. In addition, weak manufacturing pushed growth into negative territory in the last quarter of 2019. The economy is expected to return to moderate positive growth in early 2020 as the impact of transitory factors dissipates and fiscal spending takes effect. Consumer price inflation has accelerated slightly. Annual headline inflation increased to 0.5% in November. Looking ahead, subdued wage growth and expectations of stable inflation at low levels imply a weak reflation momentum in the economy.

In the United Kingdom, economic activity appears to have slowed progressively over the fourth quarter of 2019. Confidence indicators remain subdued and well below their historical averages. The outcome of the December election and the large majority obtained by Prime Minister Johnson remove the short-term risk of a no-deal Brexit at the end of January, as the Withdrawal Agreement has now become law. However, the United Kingdom is facing a tight deadline to reach an agreement on its future relationship with the European Union towards the end of 2020, and therefore policy uncertainty remains high.

The preliminary trade agreement between the United States and China removes some of the obstacles to Chinese economic activity and trade. China’s economy is showing signs of stabilisation and should benefit from the Phase 1 trade deal with the United States. The trade agreement can further support growth by improving net trade and lowering trade-related uncertainty. Meanwhile, annual headline CPI inflation stabilised in December at 4.5% but remained above the official target. The December reading remained elevated owing to ongoing high food price inflation stemming from the outbreak of African swine fever and its impact on pork prices. The latter rose by 97% in year-on-year terms in December, down from 110% in November. At the same time, CPI inflation excluding energy and food remained unchanged at 1.4% in December.

Financial developments

Long-term sovereign yields in the euro area were broadly unchanged over the review period amid some volatility, following the large decrease in 2019. Over the period under review (12 December 2019 to 22 January 2020), the GDP-weighted euro area ten-year sovereign bond yield decreased by 1 basis point to 0.20% (see Chart 3). There was some volatility, however, with easing trade tensions following the signing of a “phase 1” US‑China trade deal and increasing geopolitical tensions between the United States and Iran. Ten-year sovereign bond yields in both the United Kingdom and the United States decreased slightly over the review period, to 0.63% and 1.77% 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 12 December 2019.

The latest observations are for 22 January 2020.

Euro area sovereign bond spreads relative to the risk-free overnight index swap (OIS) rate remained broadly stable in the review period for all countries except Spain, where the spread narrowed slightly. The spread on Spanish ten-year sovereign bonds decreased by 4 basis points to 48 basis points following the formation of a new coalition government after an eight-month standstill. Overall, the GDP-weighted spread for the euro area decreased by 1 basis point to 25 basis points.

Broad indices of euro area equity prices rose amid receding trade uncertainty. In a continuation of the trend that started in early 2019, equity prices of euro area financial and non-financial corporations (NFCs) increased by 0.2% and 3.3% respectively in the review period. The positive development of NFC equity prices was supported by a reduction in the equity risk premium, which may partly reflect some relaxation of both global trade tensions and near-term risks related to Brexit.

Euro area corporate bond spreads decreased mildly over the review period. The positive risk sentiment was also reflected in lower corporate bond spreads. The spreads on both investment-grade NFC bonds and financial sector bonds relative to the risk-free rate decreased slightly to stand at 55 and 67 basis points respectively. Although corporate bond spreads are currently above 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) and the new benchmark euro short-term rate (€STR) averaged ‑46 and ‑55 basis points respectively over the review period. [1] Excess liquidity decreased by approximately €51 billion to around €1,740 billion. This decline mainly reflects voluntary repayments in the second series of targeted longer-term refinancing operations (TLTRO II) and, to a lesser extent, an increase in liquidity-absorbing autonomous factors.

The EONIA forward curve shifted slightly upwards over the review period, as markets do not expect an imminent reduction in the deposit facility rate. By the end of 2022 the curve reaches 10 basis points above the current level of the EONIA. Overall, it remains below zero for horizons up to 2025, reflecting continued market expectations of a prolonged period of negative interest rates.

In foreign exchange markets, the euro weakened slightly 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 0.9%. This largely reflected a depreciation of the euro against the Chinese renminbi (by 2.4%) and the currencies of other major emerging economies in Asia, as investor sentiment towards emerging economies improved on the prospect of a reduction in trade tensions. The euro also weakened against the Swiss franc (by 1.7%) as well as – to a lesser extent – against the US dollar (by 0.4%) and the pound sterling (by 0.1%), but strengthened against the Japanese yen (by 0.8%).


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. A positive (negative) change corresponds to an appreciation (depreciation) of the euro. All changes have been calculated using the foreign exchange rates prevailing on 22 January 2020.

Economic activity

Euro area real GDP continued to grow at a moderate pace in the third quarter of 2019 . Output in the euro area rose by 0.3%, quarter on quarter, in the third quarter of 2019, following growth of 0.2% in the second quarter (see Chart 5). Domestic demand contributed negatively to GDP growth, and changes in inventories also provided a small negative contribution, while net trade made a positive contribution. However, these contributions to growth were affected by volatility in the data. Economic indicators point to ongoing positive but moderate growth in the fourth quarter 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 third quarter of 2019 for real GDP and for December 2019 for the ESI and PMI.

Euro area labour markets remained resilient, with some moderation in growth . Employment increased by 0.1% in the third quarter of 2019 compared with the previous quarter, down from the increase of 0.2% observed in the second quarter, and in line with the moderation in output growth. Employment growth was broad-based across countries and sectors. Employment has risen for 25 consecutive quarters since mid‑2013, with the number of people employed increasing by about 11.4 million. Hourly productivity increased by 0.1%, quarter on quarter, in the third quarter of 2019, remaining unchanged from the previous quarter. The euro area unemployment rate stood at 7.5% in November 2019, remaining virtually unchanged compared to June 2019.

Looking ahead recent data and survey indicators continue to point to positive but moderating employment growth . Short-term survey indicators, despite declining from the high levels recorded in 2018, point to continued employment growth in the near term, supported by employment in the services sector.


Chart 6

Euro area employment, PMI assessment of employment and the unemployment rate

(left-hand scale: quarter-on-quarter percentage changes, diffusion index; right-hand scale: percentages 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 third quarter of 2019 for employment, December 2019 for the PMI and November 2019 for the unemployment rate.

Rising employment and income levels continue to support consumer spending . Private consumption rose by 0.5%, quarter on quarter, in the third quarter of 2019, which is the strongest rate of expansion since the third quarter of 2017. Household real disposable income has been largely unaffected by the recent economic slowdown. Annual growth of real gross disposable income rose from 2.2% in the second quarter to 2.3% in the third quarter. Overall, employment growth has continued to support labour income. In addition, lower direct taxes and social security contributions, reflecting fiscal measures in a number of euro area countries, have contributed positively to households’ purchasing power. The savings ratio increased further in the third quarter of 2019 as income growth outpaced consumption growth.

Looking ahead private consumption should continue to underpin growth in the euro area . Recent data on the volume of retail sales and new passenger car registrations point to somewhat lower consumption growth in the fourth quarter of 2019 compared with the previous quarter. However, other indicators support the picture of fairly robust consumption dynamics. Consumer confidence, which started to decline at the end of 2017, has stabilised and remained broadly steady over the course of 2019. The latest survey results also signal continued, albeit slowing, employment growth, which should continue to support household income and consumer spending.

Business investment is expected to remain subdued – in a context of still elevated uncertainty and weak profit margins – but supported by favourable financing conditions . According to the latest quarterly national accounts data for the euro area, non-construction investment declined sharply in the third quarter of 2019 (-7.7% quarter on quarter), following strong growth in the second quarter (10.3% quarter on quarter). However, this is mostly due to the incorporation of volatile Irish data for the most recent quarters, reflecting developments in investment in intellectual property products. Looking through this volatility, incoming data suggest rather moderate or even negative investment growth in the euro area. For instance, annual growth in investment in machinery and equipment has slowed gradually since 2018 (see Chart 7). As regards near-term development, in October and November 2019 industrial production of capital goods stood, on average,1.4% below its average level in the previous quarter; in the period to December industrial confidence in the capital goods production sector stabilised at levels below its historical average. Despite rising in the third quarter, firms’ profit margins remain weak in a context of ongoing elevated uncertainty. Moreover, according to the November 2019 EIB Investment Survey, the number of EU manufacturing firms planning to reduce investment in the next 12 months has risen for the first time in four years (see Box 6 entitled “Business outlook surveys as indicators of euro area real business investment”). The softer investment outlook reflects more widespread expectations of a deterioration in the economic, political and regulatory outlook over the next 12 months. The European Commission biannual investment survey from the end of November also points to modest euro area industrial investment growth in 2020. On a more positive note, favourable financing conditions continue to support business investment.


Chart 7

Non-construction investment and components

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

Sources: Eurostat and ECB calculations.
Notes: Non-construction investment is decomposed into (a) machinery and equipment, and (b) investment in intellectual property products, excluding cultivated biological resources (which have a very small weight). The chart shows an aggregation of the four largest EU Member States’ data.

Housing investment should maintain its moderate momentum over the near term, supported by buoyant demand and favourable financing conditions, but limited by supply-side constraints . According to the latest quarterly national accounts, construction investment and its housing component grew strongly in the third quarter (0.9% and 1.1% respectively, quarter on quarter), after a modest contraction in the previous quarter (-0.3% and ‑0.1% respectively, quarter on quarter). Together with the latest outcomes for construction production and building permits, short-term and survey indicators suggest that the moderate growth momentum in housing investment is likely to continue in the fourth quarter of 2019. In this period housing investment is expected to be supported mainly by strong housing demand, as shown by rising spending intentions on housing and strong demand for housing loans, while some positive signals have also emerged on the supply side, in particular looking at the PMI for housing activity.

Extra euro area exports of goods show some signs of stabilisation, while imports and intra-euro area trade weakened further in the fourth quarter of 2019 . After a rebound in export growth in the third quarter of 2019 (from negative growth in the previous quarter) preliminary trade goods data to November indicate a stabilisation of extra euro area exports, which have been characterised by pronounced volatility, most likely associated with stockpiling behaviour related to concerns about the possibility of a hard Brexit in October 2019. Data show relatively resilient growth in exports to the United States and a firming recovery in exports to Turkey and China, while exports to the rest of Asia remain subdued. On the other hand, intra-euro area goods exports and imports declined in October and November, reflecting weakness in euro area industrial production and activity. The latest release of national accounts data shows a marked decline in imports in the third quarter of 2019, mostly driven by trade in services, which contracted strongly by 5.1% after posting 8.4% growth, quarter on quarter, in the second quarter. However, this was mainly driven by Irish data. Leading indicators point to below-trend dynamics for extra-euro area exports. While the PMI for new manufacturing export orders improved to 47.3 (which is nevertheless still in contraction territory), the European Commission’s indicator on the assessment of export order books fell again in December. At the same time, signals from shipping indicators are more positive.

Incoming data and survey results point to ongoing positive but moderate economic growth in the fourth quarter of 2019. Weak global trade, together with a prolonged period of uncertainty, continue to hamper the overall performance of output growth in the euro area. For instance, industrial production stood below its average level in the third quarter, thus pointing to a further quarter-on-quarter fall in production in the fourth quarter. As regards more timely survey data, in the fourth quarter both the European Commission’s ESI and the composite output PMI were below their respective average levels in the third quarter.

Looking ahead the euro area expansion will continue to be supported by favourable financing conditions. In addition, growth is likely to be underpinned by 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. The results of the latest round of the ECB Survey of Professional Forecasters, conducted in early January, showed that the private sector GDP growth forecasts for 2020 and 2021 had only been revised marginally compared with the previous round, conducted in early October.

Although the risks surrounding the outlook for growth in the euro area, related to geopolitical factors, rising protectionism and vulnerabilities in emerging market economies, remain tilted to the downside, they have become somewhat less pronounced, as some of the uncertainty surrounding international trade is receding.

Prices and costs

HICP inflation increased to 1.3% in December 2019, up from 1.0% in November 2019. The increase reflected increases in energy inflation and, to a small extent also food inflation, more than offsetting a marginal decrease in services inflation. Energy inflation rebounded from the negative rates seen since August 2019 to turn positive again in December 2019.


Chart 8

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 December 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, although there are further indications of a moderate increase in line with previous expectations. HICP inflation excluding energy and food stood at 1.3% in December, unchanged from November, after 1.1% in October. HICP inflation excluding energy, food, travel-related items and clothing remained at 1.2% in December, unchanged from November, after 1.1% in October. Signals from other measures of underlying inflation, including the Persistent and Common Component of Inflation (PCCI) indicator and the Supercore indicator,[2] remained broadly unchanged.

Pipeline price pressures for HICP non-energy industrial goods remained broadly stable at 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 November 2019, unchanged since July 2019 and well above its long-term average. The annual rate of change in import prices for non-food consumer goods remained at ‑0.1% in November, unchanged from October and down from 0.9% in September. At the earlier stages of the supply chain, domestic producer price inflation for intermediate goods weakened further, declining to ‑1.4% in November, from ‑1.0% in October. Similarly, import price inflation for intermediate goods decreased to ‑0.9% in November, from ‑0.6% in October. Global producer price inflation excluding energy also declined further to 1.0% in November, from 1.1% in October, and was below its long-term average.

Wage growth remained resilient. Annual growth in compensation per employee stood at 2.2% in the third quarter of 2019, unchanged from the second quarter, after 2.3% in the first quarter. The figures for 2019 were affected by a significant drop in employers’ social security contributions in France.[3] Annual growth in wages and salaries per employee, which excludes social security contributions, was 2.6% in the third quarter, up from 2.5% in the second quarter. Looking across the different indicators and through temporary factors, wage growth has moved broadly sideways since mid‑2018, either at around or slightly above historical averages.

Market-based indicators of longer-term inflation expectations recovered slightly, while survey-based expectations remained at the relatively low levels seen over the course of 2019. As a result of the mild recovery, market-based indicators of longer-term inflation expectations now stand somewhat more visibly above the historical lows reached in October 2019. The five-year forward inflation-linked swap rate five years ahead stood at 1.31% on 22 January 2020, around 4 basis points above its level in mid-December 2019 and 19 basis points above the low in October 2019. The market-based probability of deflation edged down, after increasing during most of 2019, and remains below the levels observed prior to the announcement of the asset purchase programme in 2015. At the same time, the forward profile of market-based indicators of inflation expectations continues to point to the risk of a prolonged period of low inflation. The results of the ECB Survey of Professional Forecasters (SPF) for the first quarter of 2020 show average longer-term inflation expectations to be unchanged at 1.7%. Together with average point forecasts for annual HICP inflation of 1.2%, 1.4% and 1.5% for 2020, 2021 and 2022 respectively, this points to an upward sloping forward profile. The results for 2020 and 2021 are the same as in the previous survey round, where 2022 was not surveyed.


Chart 9

Market and survey-based indicators of inflation expectations

(annual percentage changes)

Sources: ECB Survey of Professional Forecasters (SPF), Eurosystem staff macroeconomic projections for the euro area (December 2019) and Consensus Economics (17 January 2020).
Notes: The SPF for the first quarter of 2020 was conducted between 7 and 13 January 2020. 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-based indicators of inflation expectations are for 22 January 2020.

Money and credit

Broad money growth has remained robust. The annual growth rate of M3 stood at 5.6% in November 2019, broadly unchanged since August 2019 (see Chart 10). M3 growth continued to be supported by bank credit creation to the private sector and the very low opportunity cost of holding money. The narrow monetary aggregate M1, which includes the most liquid components of M3, continued to be the main contributor to broad money growth. With an annual growth rate of 8.3% in November 2019, M1 was around 2 percentage points above its trough in January 2019. Among M1 components, the annual growth of currency in circulation remained solid at 5.0%, although not exceptionally high by historical standards, pointing to no pervasive substitution into cash.


Chart 10

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 November 2019.

Credit to the private sector has remained the main source of money growth, followed by external monetary inflows. In November the contribution of credit to the private sector and of external monetary inflows remained broadly unchanged (see, respectively, the blue and yellow portions of the bars in Chart 10). The support from external monetary inflows to M3 growth since October 2018 has reflected ongoing interest of foreign investors in euro area assets, in particular newly issued government securities. The termination of net monthly asset purchases under the asset purchase programme (APP) at the end of 2018 had implied that the contribution from general government securities held by the Eurosystem started to fade out (see the red portion of the bars in Chart 10) in early 2019, while the reactivation of the APP in November 2019 has so far only had limited influence on M3 growth. Furthermore, the drag from longer-term financial liabilities remained small (see the dark green portion of the bars in Chart 10).

Loans to the private sector have continued to grow at a solid rate. The annual growth rate of MFI loans to the private sector (adjusted for loan sales, securitisation and notional cash pooling) stood at 3.6% in November 2019, after 3.7% in October (see Chart 11). This development was mainly due to a decrease in the annual growth rate of loans to non-financial corporations (NFCs), which fell to 3.4% in November from 3.8% in October. The moderation in NFC loan dynamics is in line with the slowdown of economic activity observed since 2018. Loans to households grew at an annual rate of 3.5% in November 2019, unchanged from October. Overall, loan growth continued to benefit from historically low bank lending rates and the overall favourable supply of bank loans, while the slowdown in economic activity dampened loan demand, as also indicated by the results of the latest euro area bank lending survey.


Chart 11

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 November 2019.

The January 2020 euro area bank lending survey found that credit standards for loans to enterprises and loans to households for house purchase remained broadly unchanged. [4] Competition from other banks continued to contribute to an easing of credit standards for enterprises and households. In the case of loans to enterprises, there was a tightening impact stemming from risk perceptions related to the economic outlook. Credit terms and conditions (i.e. the actual conditions laid down in the loan contract) for new loans to enterprises and housing loans remained broadly unchanged in the fourth quarter of 2019. Loan demand from enterprises decreased for the first time since the fourth quarter of 2013, reflecting the slowdown in economic activity observed since 2018, with financing needs for fixed investment ceasing to make a positive contribution to loan demand, while the general low level of interest rates continued to support loan demand from firms and households. Euro area banks also indicated that their access to debt securities funding and securitisation continued to improve in the fourth quarter of 2019. At the same time, they highlighted a continued strengthening of their capital position against the backdrop of regulatory or supervisory actions in the second half of 2019 and a small tightening of their credit standards for loans to enterprises and consumer credit on account of non-performing loan ratios. Furthermore, banks indicated their intention to use TLTRO III liquidity to a large extent for granting loans to the non-financial private sector.

Very favourable lending rates continued to support euro area economic growth. Lending rates remained close to their historical lows, having declined in line with market reference rates over previous months. In November 2019 the composite bank lending rates for loans to NFCs and households remained broadly unchanged at 1.55% and 1.47% respectively (see Chart 12). Competitive pressures and more favourable bank funding costs dampened lending rates for loans to NFCs and households. Overall, composite bank lending rates for loans to NFCs and households have fallen significantly since the ECB’s credit easing measures were announced in June 2014. Between May 2014 and November 2019 composite lending rates on loans to NFCs and households fell by around 140 and 145 basis points respectively.


Chart 12

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 November 2019.


Tracking global economic uncertainty: implications for global investment and trade

Prepared by Alina Bobasu, André Geis, Lucia Quaglietti and Martino Ricci[5]

This box sheds light on the role of uncertainty in the recent slowdown of global investment and trade. Over the past year the global economy has transitioned from a robust and synchronised expansion to a widespread slowdown. Global growth has weakened on the back of soft investment, which was also a key driver of the sharp fall in global trade growth in the first half of 2019 (see Chart A)[6]. The slowdown in global investment and trade has occurred in an environment of rising trade tensions between the United States and China, slowing Chinese demand, (geo-)political tensions, Brexit and idiosyncratic stresses in several emerging economies, with rising uncertainty magnifying the negative impact. Against this backdrop, this box assesses the role of uncertainty in the recent slowdown of global investment and trade.


US yield curve inversion and financial market signals of recession

Prepared by Johannes Gräb and Stephanie Titzck

The inversion of the US yield curve in mid‑2019 led to heightened concerns about a possible US recession. The US yield curve is often seen as a predictor of recessions: a flattening or inversion of the yield curve (or negative term spread), in which interest rates at the long end are below those at the short end, has often been understood as a signal of an impending recession. In late summer 2019 the US yield curve inverted for the first time since the global financial crisis (see Chart A). Global recession analyses may help assess risks to the economic outlook. This box presents an assessment of the probability of a recession in the United States, taking into account developments that have distorted the signals derived from the current yield curve.


Breaking the “chain effect” of tariffs – foreign trade zones in the time of protectionism

Prepared by Virginia di Nino, Simone Cigna and Srdan Tatomir

In foreign trade zones (FTZs) imported goods can be handled, manufactured and re-exported without the intervention of customs authorities. This box reviews the benefits of FTZs, how they are used in the United States,[7] China[8] and the European Union (EU)[9] and whether they can cushion the rise in tariffs resulting from new trade restrictions.[10]


Integration of non-euro area central and eastern European EU countries in global value chains, export dynamics, and business cycle synchronisation with the euro area

Prepared by Francesco Chiacchio and Andrejs Semjonovs

This box reviews developments in the six non-euro area central and eastern European EU countries (Bulgaria, the Czech Republic, Croatia, Hungary, Poland and Romania) with respect to trade integration and economic synchronisation with the euro area and investigates the potential exposure of their export dynamics to changing external conditions. In recent decades, in an environment of rapid economic globalisation and increasing trade integration, firms have unbundled their production processes and scattered their input sourcing across countries. This has been particularly true for the six countries under review, which have become increasingly integrated in cross-border value chains both globally and regionally. More specifically, access to the Single Market has entailed the removal of trade barriers, lower transport costs and harmonised EU-wide standards, which have provided a decisive stimulus for firms to fragment their production and assembly operations to take advantage of local production conditions.


Bond market liquidity and swap market efficiency – what role does the repo market play?

Prepared by Jan Philipp Fritsche, Michael Grill and Claudia Lambert

This box assesses the relevance of repo markets for bond and swap markets, thereby adding to the discussion on the role of repo markets in the wider financial system. In a repurchase agreement, or “repo”, securities are sold and an agreement is entered into to repurchase them at a later date. Typically, repos are used by market participants to obtain funding using bonds as collateral. They can also be used to source specific securities against cash collateral. Repo markets play a key role in facilitating the flow of cash and securities around the financial system, thereby providing liquidity to other markets. [11] A well-functioning repo market supports the implementation of monetary policy as it propagates interest rate decisions through the financial system. At the same time, turmoil in repo market may spill over to other markets and amplify financial market stress. This box is concerned with the effects of repo market disruptions on bond markets and the interest rate swap market. Given the importance of these markets in the financial system, their proper functioning and the potential for repo market turmoil to affect it matters from both a financial stability and a monetary policy perspective.[12]


Business outlook surveys as indicators of euro area real business investment

Prepared by Eduardo Maqui

Investment survey indicators can be useful for assessing business investment developments in the euro area. The Global Business Outlook Survey on future business conditions is produced by IHS Markit on a triannual basis, with data collected in February, June and October, thus providing more timely information compared with other available investment surveys. As indicated by IHS Markit, questionnaires are sent to a representative panel of manufacturing and services sector firms, which are carefully selected to reflect the economic structure of each country in terms of sectoral contribution to GDP, regional distribution and firm size. Furthermore, its harmonised methodology allows for direct comparisons of business expectations across euro area countries, which is particularly useful for monitoring ongoing developments in business investment and policy assessments.



Household wealth and consumption in the euro area

Prepared by Gabe de Bondt, Arne Gieseck and Mika Tujula

Household wealth is the difference between the value of a household’s assets and the value of its liabilities and is one of the key determinants of private consumption. Increases in wealth can affect private consumption in the short run, as households may feel richer and become more confident. Moreover, the level of household wealth is an important factor driving longer-term consumption choices and growth. Together with future expected labour income, it determines the level of life-long resources available to households. As private consumption is by far the largest contributor to total economic activity, household wealth may have a substantial impact on the state of the economy and, ultimately, on the outlook for inflation. In turn, monetary policy may have an impact on wealth developments, not only via its impact on asset prices but also through transmission channels. Therefore, it is important to consider levels of and changes in wealth when determining the appropriate monetary policy stance.


Assessing bank lending to corporates in the euro area since 2014

Prepared by Ramón Adalid, Matteo Falagiarda and Alberto Musso[13]

Bank lending is the most important source of external finance for euro area firms and is therefore crucial for the transmission of monetary policy and, more generally, supporting economic growth. Despite the increasing relevance of non-bank financing over the last decade, bank lending remains a key element in the financing of euro area corporates. In particular, bank loans accounted for around 45% of total non-financial corporation (NFC) debt financing in 2018, down from around 60% in 2007.[14] During this period, credit markets were subject to multiple sources of stress, with the banking sector and its intermediation capacity being particularly affected. As a result, it has become even more essential from a central bank perspective to carry out careful analysis of bank lending.



Statistical annex

© European Central Bank, 2020

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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 22 January 2020.

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

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  1. The methodology for computing the EONIA changed on 2 October 2019; it is now calculated as the €STR plus a fixed spread of 8.5 basis points. See the box entitled “Goodbye EONIA, welcome €STR!”, Economic Bulletin, Issue 7, ECB, 2019.
  2. 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.
  3. For a discussion, see Box 5 entitled “Recent developments in social security contributions and minimum wages in the euro area”, Economic Bulletin, Issue 8, ECB, 2019.
  4. In the fourth quarter of 2019, credit standards (i.e. banks’ internal guidelines or loan approval criteria) for NFCs and households remained broadly unchanged (with the net percentage of banks reporting tightening standing at 1% for both types of lending, compared with ‑2% in the third quarter of 2019).
  5. With thanks to Simone Cigna and Ben Schumann for their valuable input.
  6. For more information see Box 1 “What is behind the decoupling of global activity and trade?”, Economic Bulletin, Issue 5, ECB, Frankfurt am Main, 2019.
  7. For a complete list of FTZs in the United States, see the “List of Foreign-Trade Zones by State”.
  8. For a list of FTZs in China, see the article “China: China Introduces New Free Trade Zones and Improved Practices”, International Tax Review, 15 October 2019.
  9. For a complete list of FTZs in the EU, see the document “Free zones which are in operation in the customs territory of the Union, as communicated by the Member States to the Commission”, 20 December 2019.
  10. Matt Gold, former US trade negotiator, affirmed that “in a world where trade barriers increase, FTZs become more valuable”, see the article “Trump Erects Trade Barriers, and ‘Foreign Trade Zones’ Take Them Down”, Governing: The Future of States and Localities, 6 March 2018.
  11. See “Repo market functioning”, CGFS Papers, No 59, Committee on the Global Financial System, 2017.
  12. Bond market liquidity plays a crucial role in the conduct of monetary policy and the stability of the financial system. Monitoring bond market liquidity conditions as well as the factors that determine how they are affected by market stress is of vital importance. See “Fixed income market liquidity”, CGFS Papers, No 55, Committee on the Global Financial System, 2016. Swaps represent the largest derivative market in terms of the notional amount of outstanding trades and play an important role in particular for the hedging of interest rate risk. See, e.g., Fontana, S., Holz auf der Heide, Pellizon, L. and Scheicher, M., “The anatomy of the euro area interest rate swap market”, Working Paper Series, No 2242, ECB, Frankfurt am Main, February 2019, for a discussion of the significance of this market.
  13. Data support provided by Filippo Claps and Franziska Fischer.
  14. For more details on the factors underlying this trend, see “The structural dimension of the financing of non-financial corporations and households in the euro area”, Annual Report, ECB, Frankfurt am Main, 2017.