Economic and monetary developments
After the contraction in the first quarter of the year, the euro area economy is gradually reopening as the coronavirus (COVID-19) pandemic situation improves and vaccination campaigns make significant progress. The latest data signal a bounce-back in services activity and ongoing dynamism in manufacturing production. Economic activity is expected to accelerate in the second half of this year as further containment measures are lifted. A pick-up in consumer spending, strong global demand and accommodative fiscal and monetary policies will lend crucial support to the recovery. At the same time, uncertainties remain, as the near-term economic outlook continues to depend on the course of the pandemic and on how the economy responds after reopening. Inflation has picked up over recent months, largely on account of base effects, transitory factors and an increase in energy prices. It is expected to rise further in the second half of the year, before declining as temporary factors fade out. The new staff projections point to a gradual increase in underlying inflation pressures throughout the projection horizon, although the pressures remain subdued in the context of still significant economic slack that will only be absorbed gradually over the projection horizon. Headline inflation is expected to remain below the Governing Council’s aim over the projection horizon.
Preserving favourable financing conditions over the pandemic period remains essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability. Financing conditions for firms and households have remained broadly stable since the Governing Council’s monetary policy meeting in March. However, market interest rates have increased further. While partly reflecting improved economic prospects, a sustained rise in market rates could translate into a tightening of wider financing conditions that are relevant for the entire economy. Such a tightening would be premature and would pose a risk to the ongoing economic recovery and the outlook for inflation. Against this background and based on a joint assessment of financing conditions and the inflation outlook, the Governing Council decided to confirm its very accommodative monetary policy stance.
Economic and monetary assessment at the time of the Governing Council meeting of 10 June 2021
The June 2021 Eurosystem staff macroeconomic projections suggest that global economic activity continued to recover at the turn of the year despite the intensification of the pandemic, with emerging market economies becoming the epicentre of new infections globally. While activity in the fourth quarter of 2020 turned out to be slightly stronger than expected in the previous projections, the global economy entered 2021 on a weaker footing amid a resurgence in new infections and tighter containment measures. Recent surveys signal strong momentum in global activity, although signs of divergence between advanced and emerging market economies, and between the manufacturing and services sectors, are becoming more apparent. The large fiscal stimulus approved by the Biden administration is projected to strengthen the recovery in the United States, with some positive global spillovers. Against this backdrop, the growth outlook for the global economy is little changed compared to the previous projections. Global real GDP growth (excluding the euro area) is projected to increase by 6.2% this year, before slowing to 4.2% and 3.7% in 2022 and 2023 respectively. However, euro area foreign demand was revised upwards compared with the previous projections. It is projected to increase by 8.6% this year and by 5.2% and 3.4% in 2022 and 2023 respectively. This mainly reflects stronger demand from the United States and the United Kingdom, the euro area’s key trading partners. The export prices of euro area competitors were revised upwards for this year amid higher commodity prices and stronger demand. Risks to the global baseline projections relate mainly to the future course of the pandemic. Other risks to the global outlook for activity are judged to be broadly balanced, while the risks for global inflation are tilted to the upside.
Financial conditions in the euro area have continued to tighten somewhat since the last Governing Council meeting, amid positive risk sentiment. Over the review period (11 March to 9 June 2021), euro area sovereign bond yields and their spreads over the overnight index swap (OIS) rate increased moderately, mainly amid an improved economic outlook in the light of progress in vaccination campaigns across the euro area together with continuing policy support. The forward curve of the euro overnight index average (EONIA) increased marginally across medium to long-term maturities, while the short end of the curve has remained largely the same, suggesting no expectations of an imminent policy rate change in the very near term. Equity prices also increased, supported by a combination of still relatively low discount rates and a strong recovery in corporate earnings growth expectations. Mirroring equity prices, euro area corporate bond spreads continued to tighten and stand at levels last observed prior to March 2020. In foreign exchange markets, the nominal effective exchange rate of the euro strengthened slightly.
In the first quarter of the year, euro area real GDP declined further, by 0.3%, to stand 5.1% below its pre-pandemic level of the fourth quarter of 2019. Business and consumer surveys and high-frequency indicators point to a sizeable improvement in activity in the second quarter of this year. Business surveys indicate a strong recovery in services activity as infection numbers decline, which will allow a gradual normalisation of high-contact activities. Manufacturing production remains robust, supported by solid global demand, although supply-side bottlenecks could pose some headwinds for industrial activity in the near term. Indicators of consumer confidence are strengthening, suggesting a strong rebound in private consumption in the period ahead. Business investment shows resilience, despite weaker corporate balance sheets and the still uncertain economic outlook. Looking ahead, growth is expected to continue to improve strongly in the second half of 2021 as progress in vaccination campaigns allows a further relaxation of containment measures. Over the medium term, the recovery in the euro area economy is expected to be buoyed by stronger global and domestic demand, as well as by continued support from both monetary policy and fiscal policy.
This assessment is broadly reflected in the baseline scenario of the June 2021 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP growth at 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023. Compared with the March 2021 ECB staff macroeconomic projections, the outlook for economic activity has been revised up for 2021 and 2022, while it is unchanged for 2023.
Overall, the risks surrounding the euro area growth outlook are broadly balanced. On the one hand, an even stronger recovery could be predicated on brighter prospects for global demand and a faster-than-anticipated reduction in household savings once social and travel restrictions have been lifted. On the other hand, the ongoing pandemic, including the spread of virus mutations, and its implications for economic and financial conditions continue to be sources of downside risk.
According to Eurostat’s flash release, euro area annual inflation increased from 1.3% in March to 1.6% in April and 2.0% in May 2021. This rise was due mainly to a strong increase in energy price inflation, reflecting both sizeable upward base effects as well as month-on-month increases, and, to a lesser extent, a slight increase in non-energy industrial goods inflation. Headline inflation is likely to increase further towards the autumn, reflecting mainly the reversal of the temporary VAT reduction in Germany. Inflation is expected to decline again at the start of next year as temporary factors fade out and global energy prices moderate. Underlying price pressures are expected to increase somewhat this year owing to temporary supply constraints and the recovery in domestic demand. Nevertheless, the price pressures will likely remain subdued overall, in part reflecting low wage pressures, in the context of still significant economic slack, and the appreciation of the euro exchange rate. Once the impact of the pandemic fades, the unwinding of the high level of slack, supported by accommodative monetary and fiscal policies, will contribute to a gradual increase in underlying inflation over the medium term. Survey-based measures and market-based indicators of longer-term inflation expectations remain at subdued levels, although market-based indicators have continued to increase.
This assessment is broadly reflected in the baseline scenario of the June 2021 Eurosystem staff macroeconomic projections for the euro area, which foresees annual inflation at 1.9% in 2021, 1.5% in 2022 and 1.4% in 2023. Compared with the March 2021 ECB staff macroeconomic projections, the outlook for inflation has been revised up for 2021 and 2022, largely owing to temporary factors and higher energy price inflation. It is unchanged for 2023, as the increase in underlying inflation is largely counterbalanced by an expected decline in energy price inflation. HICP inflation excluding energy and food is projected to increase from 1.1% in 2021 to 1.3% in 2022 and 1.4% in 2023, revised up throughout the projection horizon compared with the March 2021 projection exercise.
Money creation in the euro area moderated in April 2021, showing some initial signs of normalisation following the massive monetary expansion associated with the coronavirus crisis. Broad money (M3) growth declined to 9.2% in April 2021, from 10.0% in March and 12.3% in February. The deceleration in March and April was due partly to strong negative base effects as the large inflows in the initial phase of the pandemic crisis dropped out of the annual growth statistics. It also reflects a moderation in shorter-term monetary dynamics, mainly originating from weaker developments in deposits by households and firms in April and lower liquidity needs as the pandemic situation improves. The ongoing asset purchases by the Eurosystem continue to be the largest source of money creation. While also decelerating, the narrow monetary aggregate M1 has remained the main contributor to broad money growth. Its strong contribution is consistent with a still heightened preference for liquidity in the money-holding sector and a low opportunity cost of holding the most liquid forms of money.
The annual growth rate of loans to the private sector declined to 3.2% in April, from 3.6% in March and 4.5% in February. This decline took place amid opposing dynamics in lending to non-financial corporations and to households. The annual growth rate of loans to non-financial corporations fell to 3.2% in April, after 5.3% in March and 7.0% in February. The contraction reflects large negative base effects and some frontloading in loan creation in March relative to April. The annual growth rate of loans to households rose to 3.8% in April, after 3.3% in March and 3.0% in February, supported by solid monthly flows and positive base effects. Overall, the Governing Council’s policy measures, together with the measures adopted by national governments and other European institutions, remain essential to support bank lending conditions and access to financing, in particular for those most affected by the pandemic.
As a result of the very sharp economic downturn during the coronavirus pandemic and the strong fiscal reaction, the general government budget deficit in the euro area increased strongly, to 7.3% of GDP in 2020 from 0.6% in 2019. This year, as new waves of the pandemic have hit euro area countries, many emergency measures have been extended and additional recovery support has been put in place. As a result, the June 2021 Eurosystem staff macroeconomic projections foresee only a marginal improvement in the general government budget balance in the euro area to -7.1% of GDP in 2021. However, as the pandemic abates and the economic recovery takes hold, the deficit ratio is expected to fall more swiftly, to 3.4% in 2022 and 2.6% at the end of the projection horizon in 2023. Euro area debt is projected to peak at just below 100% of GDP in 2021 and to decline to around 95% of GDP in 2023, which is about 11 percentage points higher than before the coronavirus crisis. Nonetheless, an ambitious and coordinated fiscal stance remains crucial, as a premature withdrawal of fiscal support would risk weakening the recovery and amplifying the longer-term scarring effects. National fiscal policies should thus continue to provide critical and timely support to the firms and households most exposed to the ongoing pandemic and the associated containment measures. At the same time, fiscal measures should remain temporary and countercyclical, while ensuring that they are sufficiently targeted in nature to address vulnerabilities effectively and to support a swift recovery in the euro area economy. As a complement to national fiscal measures, the Next Generation EU package is expected to play a key role by contributing to a faster, stronger and more uniform recovery. It should increase economic resilience and the growth potential of EU Member States’ economies, particularly if the funds are used for productive public spending and are accompanied by productivity-enhancing structural policies. According to the June macroeconomic projections, the combination of Next Generation EU grants and loans should provide additional stimulus of around 0.5% of GDP per year between 2021 and 2023.
The monetary policy decisions
On 10 June 2021 the Governing Council decided to reconfirm its very accommodative monetary policy stance in order to preserve favourable financing conditions for all sectors of the economy, which is needed for a sustained economic recovery and for safeguarding price stability.
- The Governing Council decided to keep the key ECB interest rates unchanged. They are expected to remain at their present or lower levels until the inflation outlook robustly converges to a level sufficiently close to, but below, 2% within the projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
- The Governing Council will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until the Governing Council judges that the coronavirus crisis phase is over. Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year. The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation. Furthermore, the Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
- Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under 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 the Governing Council starts raising the key ECB interest rates. In addition, 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.
- Finally, the Governing Council will continue to provide ample liquidity through its refinancing operations. The funding obtained through the third series of targeted longer-term refinancing operations (TLTRO III) plays a crucial role in supporting bank lending to firms and households.
The Governing Council will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook. It stands 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.
1 External environment
The June 2021 Eurosystem staff macroeconomic projections suggest that global economic activity continued to recover at the turn of the year. While activity in the fourth quarter of 2020 turned out to be slightly stronger than had been expected in the previous projections, the global economy entered 2021 on a weaker footing amid a resurgence in new infections and tighter containment measures. Recent surveys signal strong momentum in global activity, although signs of divergence between advanced and emerging market economies, and between the manufacturing and services sectors are becoming more apparent. The large fiscal stimulus approved by the Biden administration is projected to strengthen the recovery in the United States, with some positive global spillovers. Against this backdrop, the growth outlook for the global economy is little changed compared to the previous projections. Global real GDP (excluding the euro area) is projected to increase by 6.2% this year, before slowing to 4.2% in 2022 and 3.7% in 2023. However, euro area foreign demand was revised upwards compared with the previous projections. It is projected to increase by 8.6% this year and by 5.2% and 3.4% in 2022 and 2023 respectively. This mainly reflects stronger demand from the United States and the United Kingdom, the euro area’s key trading partners. The export prices of euro area competitors were revised upwards for this year amid higher commodity prices and stronger demand. Risks to the global baseline projections relate mainly to the future course of the pandemic. Other risks to the global outlook for activity are judged to be broadly balanced, while the risks for global inflation are tilted to the upside.
Global economic activity and trade
Global economic activity continued to recover at the turn of the year despite the intensification of the pandemic. Global real GDP growth (excluding the euro area) increased by 2.6% quarter on quarter in the fourth quarter of 2020, which was stronger than had been expected in the March 2021 ECB staff macroeconomic projections. However, the global economy entered the year on a weaker footing, as a resurgence in new infections led governments to tighten containment measures. Consequently, global real GDP growth (excluding the euro area) is estimated to have slowed markedly to 0.7% quarter on quarter in the first quarter of 2021. This pattern reflects slower growth in advanced and emerging market economies alike. At the same time, activity in advanced economies was more resilient than had been expected in the previous projections, as households and firms adapted better to lockdowns, and additional policy stimulus was implemented. The slowdown in emerging market economies (EMEs), by contrast, turned out to be more pronounced.
The pandemic intensified in EMEs, while the situation in advanced economies improved markedly with the roll-out of vaccination campaigns. Earlier this year, the situation also deteriorated in Europe, while the rapid pace of vaccination in the United Kingdom and the United States helped to push down the number of new infections in advanced economies overall. The pandemic situation in EMEs remains precarious and continues to be the key factor shaping economic developments across countries.
At the current juncture, survey data signal strong momentum in global activity amid more apparent signs of divergence across countries and sectors. The global composite output PMI increased to 58.8 in May – well above its long-term average and also outside its historical interquartile range. While the strong momentum is generally visible across both the manufacturing and the services sectors, lately some differences across countries and sectors have become more apparent. First, the growth momentum in advanced economies is solid and has recently strengthened further. This contrasts with EMEs, where activity continues to improve at a slower pace (Chart 1, upper panel). Second, there was a sharp pick-up in the pace of economic expansion in the services sector as restrictions were lifted. This rapid expansion should also be seen in the context of the recovery starting from low levels, especially in contact-intensive services. By contrast, manufacturing output, which proved more resilient at the height of the pandemic, continues to grow at a slower, albeit still buoyant, pace amid some headwinds created by supply constraints (Chart 1, lower panel).
Global (excluding the euro area) output PMI by regions and sectors
The global recovery has been supported by very accommodative financial conditions. In both advanced and emerging market economies, financial conditions remain supportive, as rising bond yields were offset by higher equity prices and narrowing corporate bond spreads.
The near-term outlook for the global economy continues to be shaped by the potential course of the pandemic. In advanced economies outside the euro area, the swift roll-out of vaccinations holds the promise that the pandemic can be contained, economies can gradually re-open and then recover rather quickly. This contrasts with the pandemic situation in some large EMEs, where economic activity is expected to have weakened further despite the relatively limited restrictions on mobility implemented by authorities to date.
Some positive spillovers to the global economy are expected from the large fiscal stimulus approved by the Biden administration, which will strengthen the recovery in the United States. The American Rescue Plan (ARP), totalling USD 1.9 trillion (8.9% of GDP), includes a renewal of unemployment benefits, additional one-off payments to households and an increase in both local and state spending to finance public health efforts and education. Additional stimulus checks sent out since the ARP was signed into law in mid-March are projected to stimulate private consumption in the coming quarters, leading to positive spillovers to other countries through trade linkages. Meanwhile, the Biden administration announced two new medium-term fiscal plans, namely the American Jobs Plan and the American Families plan. The former proposes a variety of infrastructure investments to be partly financed by higher corporate income taxes, while the latter focuses on social welfare spending and tax credits, and is almost fully financed by higher personal income taxes. Overall, the impact of the two plans on economic activity is estimated to be more limited compared with the ARP owing to their decade-long implementation and the fact that they will be funded by higher taxes.
The growth outlook for the global economy is little changed compared to the previous projections. Global real GDP (excluding the euro area) is projected to increase by 6.2% this year, before slowing to 4.2% in 2022 and 3.7% in 2023. It has been revised downwards by 0.3 percentage points in 2021 and upwards by 0.3 percentage points in 2022 compared with the previous projections, and remained unchanged for 2023. This pattern reflects an interplay of factors, including a worsening of the pandemic in advanced economies at the beginning of this year and in EMEs more recently, as well as the macroeconomic impact of the large fiscal stimulus in the United States and an improving outlook in other advanced economies as a result of the fast vaccine roll-out. Among EMEs, in India the near-term outlook worsened significantly owing to a deterioration in epidemiological conditions. However, mobility and economic indicators suggest that the fallout from the current wave may not be as severe as that observed last spring.
In the United States, economic activity is projected to expand on the back of strong policy support and a gradual reopening of the economy. Following solid quarter-on-quarter annualised growth of 6.4% in the first quarter of 2021, activity is expected to pick up further in the second quarter amid strong consumer spending supported by the disbursement of government direct income support to households. Meanwhile, in the labour market, the vacancy rate stood at elevated levels, while the unemployment rate continued to be relatively high. This suggests that skills mismatches in the labour market and a shortage of workers in contact-intensive services sectors may create some headwinds as the economy reopens. Employment surveys indicate that growth in hourly earnings accelerated in April, and the number of hours worked per week jumped to an all-time high, in particular in industries with a large number of vacancies, such as food services. Headline annual consumer price inflation increased to 4.2% in April. While the rise in headline inflation resulted mainly from a strong annual increase in the energy component, core inflation also increased significantly as sectors hit hard by the pandemic have increased prices significantly as the economy reopens, for example prices of air fares and accommodation. Disruption to global supply chains weighed on car production in the United States and is likely to have contributed to higher prices for used cars in April.
In the United Kingdom, fiscal spending and the extension of key measures taken in response to the coronavirus are expected to support the economy. Real GDP growth contracted by 1.5% in the first quarter of 2021, when a strict lockdown was in place. This relatively mild contraction suggests that firms and households adapted well to government restrictions. Private consumption contributed negatively nonetheless, as did the significant reversal of the stocks built up late last year in response to fears of a “no-deal” Brexit. However, towards the end of the first quarter, as vaccination progressed and restrictions on mobility were gradually eased, economic activity started to pick up. Business surveys, consumer confidence and mobility trackers all signal a strong rebound in the second quarter. Annual consumer price inflation increased to 1.5% in April, up from 0.7% in the previous month, while core inflation increased to 1.3% in April, up from 1.1% in March. The rise in inflation was mostly driven by energy prices as the recent rise in oil prices started to feed through to household energy prices, adding to the increase in transport prices. Looking ahead, headline inflation is expected to continue to rise towards the Bank of England’s 2% target over the next few months, mainly owing to base effects stemming from weak price pressures in spring 2020 and the impact of recent rises in energy prices.
In China, economic activity is expected to continue to grow at a steady pace over the projection horizon. In May survey data pointed to a steady growth momentum. This followed weaker than expected outturns in industrial production and retail sales growth in the previous month, while in April export growth was solid and is becoming broader based against the backdrop of stronger global demand. Expansionary policies also continued to support the recovery, although the policy stance is gradually becoming more balanced. Looking ahead, the main driver of economic activity is expected to switch from investment to private consumption as the outlook for employment and income firms up. Annual headline consumer price inflation increased modestly to 1.3% in May, up from 0.9% in April. Consumer price inflation remains subdued overall. While energy prices increased markedly, the recovery in pork meat supply, following last year’s outbreak of African swine fever, is keeping food price inflation contained. Meanwhile, annual producer price inflation increased to 9.0% in May.
In Japan, the recovery is expected to resume more firmly later this year and to proceed at a moderate pace thereafter. Stronger domestic demand following an easing of containment measures, as well as continued fiscal support and recovering external demand, are expected to support the gradual but steady recovery. Real GDP fell by 1.3% in the first quarter of 2021, as the second state of emergency, enacted between early January and mid-March, weighed on private consumption and business investment. The third state of emergency announced in late-April and limited progress on vaccination are likely to defer a firmer recovery to the second half of this year. Annual headline CPI inflation stood at -0.4% in April, as the impact of rising energy prices was outweighed by a sharp decline in mobile phone charges. Annual CPI inflation is projected to rise gradually over the projection horizon, but to remain below the Bank of Japan’s target.
In central and eastern European EU Member States, the recovery slowed significantly at the turn of the year. It is expected to decelerate further in the near term as the worsened pandemic conditions continue to weigh on activity. Once lockdowns are eased and progress is made on vaccinations, activity is forecast to gradually regain momentum, supported by accommodative fiscal and monetary policies.
In large commodity-exporting countries, economic activity is recovering as global demand strengthens. In Russia, following a relatively mild recession last year, economic activity in the first quarter was estimated to increase slightly. Looking ahead, stronger global demand for oil, together with a rebound in consumption and investment, are expected to support activity over the projection horizon. In Brazil, activity continued to recover in the first quarter and stood close to its pre-pandemic levels despite the resurgence in new infections. Looking ahead stronger foreign demand and private consumption are expected to drive the recovery. By contrast, monetary policy has recently been tightening, while fiscal space continues to be limited.
In Turkey, domestic demand is slowing amid the gradual withdrawal of credit stimulus. Furthermore, increased policy uncertainty and weakened market confidence continue to weigh on near-term economic prospects. The impact of weaker domestic absorption on economic activity has been offset by stronger export performance in the first quarter of 2021. Looking ahead, provided that the recent shift in policy direction towards macroeconomic stability is sustained, real GDP growth is likely to remain subdued but more balanced.
The recovery in global trade proceeds unabated as domestic demand strengthens in advanced economies and China. Following the dynamic recovery in global goods imports (excluding the euro area) in late 2020, growth momentum has slowed somewhat more recently. The recovery is mainly driven by an improvement in domestic absorption in key advanced economies and in China, despite some higher volatility recorded around the Lunar New Year holiday period (Chart 2). While international trade in services is picking up steam, its ascent from the trough reached in late spring 2020 remains gradual, as containment measures and travel restrictions remain in place. In the near term the recovery in trade is expected to proceed unabated. The PMI manufacturing new export orders index increased further in May, staying well above its long-term average, suggesting a further acceleration in global trade in the near term. However, disruptions in global supply chains continue to create headwinds to the recovery of global trade. High-frequency indicators of supply chain bottlenecks, such as the PMIs for work backlogs, have risen to their highest levels since the aftermath of the global financial crisis, while PMI supplier delivery times lengthened and now stand close to the all-time high registered at the peak of the pandemic. Furthermore, the high level of the PMI new order-to-inventory ratio and PMI backlog of work signal that production is struggling to meet strong and rising demand, especially in the technology and automobile industries.
Global (excluding the euro area) imports of goods and new export orders
The improved outlook in key trading partners of the euro area led to stronger euro area foreign demand. Euro area foreign demand is forecast to expand by 8.6% this year and by 5.2% and 3.4% in 2022 and 2023 respectively – an upward revision for all three years compared with the March 2021 ECB staff macroeconomic projections. This mainly reflects the stronger than projected demand from the United States and the United Kingdom, notwithstanding weaker than expected outturns in the first quarter. Overall, more positive outturns at the start of the year and an improved outlook in some key euro area trading partners imply that the gap in the trajectory of global trade relative to the pre-pandemic path has narrowed further. Global imports (excluding the euro area) were also revised upwards over the projection horizon and are expected to increase by 10.8% in 2021, before slowing to 4.9% in 2022 and 3.7% in 2023.
Risks to the baseline projections for global growth are judged to be broadly balanced, while those for global inflation are tilted to the upside. In line with the previous projection rounds, two alternative scenarios for the global outlook are used to illustrate the uncertainty surrounding the future course of the pandemic. These scenarios reflect the interplay between developments in the pandemic and the associated path of containment measures. Other risks to the global outlook for activity relate to a faster than currently projected unwinding of excess savings built up across advanced economies during the pandemic. This could lead to stronger private consumption in these economies and thus activity and inflation. Prospects of a stronger and faster recovery in advanced economies may alter market participants’ expectations about global monetary policy prospects and increase the risk of repricing in global financial markets. This kind of repricing commonly weighs more on EMEs, especially those with weak fundamentals. It would accentuate the risks associated with high indebtedness across advanced and emerging market economies. If disruptions in global supply chains are more protracted than currently assumed, stronger inflationary pressures and headwinds to the recovery in global activity and trade could result.
Global price developments
Global commodity prices have increased further since the previous projections. The price rally that had already started last summer halted temporarily in March amid volatile market sentiment in the face of rising sovereign bond yields. This led to a slight correction in oil prices, while food and metals prices have remained broadly stable. Since then, however, prices have moved higher, as accommodative policies coupled with the ongoing vaccine roll-out and expected lifting of containment measures have led to an improved demand outlook for commodities. According to the International Energy Agency, global oil demand is expected to recover most of the volume lost during the pandemic by the end of 2021. Against this backdrop, OPEC+ has gradually revised its production targets upwards, which also includes the phasing-out of the unilateral production cuts by Saudi Arabia. Overall, global oil prices are being shaped by a combination of stronger demand and gradually increasing supply and are also underpinned by a positive global risk sentiment.
Global consumer price inflation is projected to increase amid higher commodity prices and recovering demand. However, the projected increase in inflation is likely to be transitory, given the degree of slack in the global economy and anchored inflation expectations. Annual consumer price inflation in member countries of the Organisation for Economic Co-operation and Development (OECD) increased to 3.3% in April, up from 2.4% in March (Chart 3). Energy prices rose sharply, while food price inflation eased further in April. Core consumer price index inflation (excluding food and energy) increased to 2.4% in April, up from 1.8% the previous month. Headline annual consumer price inflation increased across all advanced economies but remained in negative territory in Japan. With regard to major non-OECD EMEs, in China annual headline inflation edged back more firmly into positive territory after two quarters of near-zero inflation.
OECD consumer price inflation
The rising inflation observed this year and its expected gradual deceleration thereafter is also embedded in euro area competitors’ export price projections. Euro area competitors’ export prices (in national currency) are projected to increase significantly in the course of this year. Compared with the March 2021 ECB staff macroeconomic projections, euro area competitors’ export prices were revised upwards for this year amid higher commodity prices and stronger demand. Looking further ahead euro area competitors’ export prices are broadly comparable to previous projections.
2 Financial developments
While the forward curve of the euro overnight index average (EONIA) increased slightly across medium to long-term maturities, the short end of the curve has remained largely the same, suggesting no expectations of an imminent policy rate change in the very near term. Over the review period (11 March to 9 June 2021), euro area sovereign bond yields increased moderately, mainly amid an improved economic outlook in the light of progress in vaccination campaigns across the euro area together with continuing policy support. The more recent widening in sovereign spreads over the overnight index swap (OIS) rate across jurisdictions may be related in part to speculation about an early tapering of purchases under the pandemic emergency purchase programme (PEPP). Equity prices also increased, supported by a strong recovery in corporate earnings growth expectations while discount rates remained relatively low. Mirroring equity prices, euro area corporate bond spreads continued to tighten and stand at levels last observed prior to March 2020. In foreign exchange markets, the nominal effective exchange rate of the euro strengthened slightly.
The EONIA and the benchmark euro short-term rate (€STR) averaged -48 and -57 basis points respectively over the review period. Excess liquidity increased by approximately €516 billion to around €4,207 billion, mainly reflecting asset purchases under the PEPP and the asset purchase programme (APP), as well as the TLTRO III.7 operation take-up of €330.5 billion. These liquidity injections were partially offset by developments in autonomous factors and expiring TLTRO II operations.
While the EONIA forward curve shifted slightly upwards across medium to long-term maturities over the review period, the short end of the curve remained broadly unchanged and continues to indicate no expectations of an imminent change in the deposit facility rate (Chart 4). The short end of the EONIA forward curve is currently almost completely flat, suggesting that financial market participants are not pricing in an imminent rate cut or hike. The 10-year EONIA spot rate rose by 6.2 basis points.
EONIA forward rates
Euro area sovereign bond yields increased somewhat over the review period (Chart 5). Euro area sovereign bond yields rose notably as term premia became less negative. The brightening of the public health situation and a corresponding improvement in market participants’ assessment of the economic outlook contributed to the movement. Specifically, the GDP-weighted euro area ten-year sovereign bond yield increased by 14 basis points to reach 0.13%. At the same time, ten-year sovereign bond yields in the United States and the United Kingdom decreased slightly to stand at 1.49% and 0.73% respectively.
Ten-year sovereign bond yields
Long-term spreads of euro area sovereign bonds relative to OIS rates increased moderately (Chart 6). While the widening of yield spreads over the review period can partly be attributed to an increase in credit risk premia, more recent gyrations may likewise be related to speculation about adjustments in the pace of PEPP purchases as well as significant sovereign bond supply. Overall, the increase in sovereign spreads has been broad-based across countries, with Italian, Portuguese and French ten-year spreads increasing by 16, 15 and 15 basis points to stand at 0.83%, 0.40% and 0.11% respectively. Over the same period, German and Spanish ten-year spreads increased by 3 and 4 basis points to reach -0.25% and 0.41% respectively.
Ten-year euro area sovereign bond spreads vis-à-vis the OIS rate
Equity prices increased on both sides of the Atlantic, reaching record highs in the United States, on the back of higher earnings growth expectations and discount rates remaining at relatively low levels (Chart 7). Euro area equity prices rose against the backdrop of persistently low discount rates and especially of a strong recovery in corporate earnings growth expectations. However, equity markets continue to signal an uneven recovery across sectors and countries. At the same time, there are no evident signs of overvaluation or excessive risk taking. Overall, the stock prices of euro area and US non-financial corporations (NFCs) increased by 7.9% and 5.4% respectively, while the equity prices of euro area and US banks rose by 11% and 8.6%.
Euro area and US equity price indices
Euro area corporate bond spreads continued to tighten slightly to levels last observed prior to March 2020 (Chart 8). Mirroring the increase in equity prices, euro area corporate bond spreads continued to decline. Over the review period, the investment-grade NFC bond spread and financial sector bond spread (relative to the risk-free rate) narrowed by 8 and 9 basis points respectively, to stand at pre-pandemic levels. Reasons for the continued tightening are likely related to further improvements in the macroeconomic outlook, coupled with the unprecedented policy support and rating agencies’ currently relatively benign view of near-term credit risks. Despite this, pockets of vulnerability continue to exist, and the current level of spreads appears to be predicated on ongoing policy support.
Euro area corporate bond spreads
In foreign exchange markets, the euro appreciated slightly in trade-weighted terms (Chart 9) in the context of an improved economic outlook for the euro area. Over the review period, the nominal effective exchange rate of the euro, as measured against the currencies of 42 of the euro area’s most important trading partners, strengthened by 0.5%. The euro appreciated against the US dollar (by 1.9%), reflecting the improved outlook for the euro area economy as the pace of vaccination picked up, coupled with the weakness of the dollar, which declined from the end of March alongside US Treasury yields. The euro also appreciated against the Japanese yen (by 2.7%), the pound sterling (by 0.4%) and the Chinese renminbi (by 0.3%). The euro appreciated strongly (by 17.5%) against the Turkish lira, which experienced broad-based weakness, while depreciating markedly (by 8.5%) against the Brazilian real, which broadly strengthened on the back of rebounding commodity prices. The euro also depreciated against the Swiss franc (by 1.4%) and the currencies of several non-euro area EU Member States, including the Hungarian forint, the Czech koruna and the Polish zloty.
Changes in the exchange rate of the euro vis-à-vis selected currencies
3 Economic activity
GDP declined further by 0.3% in the first quarter of 2021 to stand 5.1% below its pre-pandemic level of the fourth quarter of 2019. Domestic demand contributed negatively to growth in the first quarter of 2021, while net trade provided a small positive contribution. Changes in inventories had a strong positive impact on growth. Business and consumer surveys and high-frequency indicators point to a sizeable improvement in activity in the second quarter of this year. Manufacturing production remains robust, supported by solid global demand, although supply-side bottlenecks could pose some headwinds for industrial activity in the near term. At the same time, business surveys indicate a strong recovery in services activity as infection numbers decline, which will allow a gradual normalisation of high-contact activities. Indicators of consumer confidence are strengthening, suggesting a strong rebound in private consumption in the period ahead. Business investment shows resilience, despite weaker corporate balance sheets and the still uncertain economic outlook. Growth is expected to continue to improve strongly in the second half of 2021 as progress in vaccination campaigns should allow a further relaxation of containment measures. Over the medium term, the recovery in the euro area economy is expected to be buoyed by stronger global and domestic demand, as well as by continued support from both monetary policy and fiscal policy.
This assessment is broadly reflected in the baseline scenario of the June 2021 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP growth at 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023. Compared with the March 2021 ECB staff macroeconomic projections, the outlook for economic activity has been revised up for 2021 and 2022, while it is unchanged for 2023.
Overall, the risks surrounding the euro area growth outlook are assessed as broadly balanced. On the one hand, an even stronger recovery could be predicated on brighter prospects for global demand and a faster-than-anticipated reduction in household savings once social and travel restrictions have been lifted. On the other hand, the ongoing pandemic, including the spread of virus mutations, and its implications for economic and financial conditions continue to be sources of downside risk.
Following a renewed contraction in output in the first quarter of 2021, economic activity in the euro area is set for a rebound in the second quarter. Real GDP declined further by 0.3% quarter on quarter in the first quarter of 2021, following a fall of 0.6% in the fourth quarter of last year (Chart 10). The decline was somewhat lower than the 0.4% contraction foreseen in the March 2021 ECB staff macroeconomic projections. The fall in output in the first quarter was due to domestic demand, particularly private consumption, while changes in inventories had a strong positive impact with a further small positive contribution from net trade. On the production side, developments in the first quarter continued to vary significantly across sectors. While value added in the services sector declined further, output in the industrial sector (excluding construction) increased again.
Euro area real GDP and its components
The euro area labour market continues to benefit from significant policy support mitigating the impact of the pandemic. According to the preliminary flash data release, employment declined by 0.3% quarter on quarter in the first quarter of 2021, following an increase of 0.3% in the fourth quarter of 2020 (Chart 11). The unemployment rate in that quarter consequently increased to 8.2% from 8.0% in the previous quarter. Employment in the first quarter of 2021 was 2.2% below the level recorded in the fourth quarter of 2019 prior to the outbreak of the pandemic. Hours worked continue to play an important role in the adjustment of the euro area labour markets and policy responses to the challenges posed by the pandemic. Total hours worked declined by 1.5% quarter on quarter in the fourth quarter of 2020 – the last available data point – following an increase of 14.7% in the third quarter, remaining 6.4% below the level seen at end-2019. Meanwhile, the unemployment rate declined to 8.0% in April 2021 from a level of 8.1% in the previous month and below the pandemic crisis peak of 8.7% recorded in August 2020. Nevertheless, the unemployment rate exceeds the pre-pandemic level of 7.3% recorded in February 2020. Workers covered by job retention schemes were estimated to account for around 6% of the labour force in March 2021, down from almost 20% in April 2020. However, the number of workers covered by such schemes has been rising since October 2020 as a result of renewed containment measures in some countries. Looking ahead, the substantial numbers of workers who are still covered by job retention schemes pose upward risks to the unemployment rate.
Euro area employment, the PMI assessment of employment and the unemployment rate
Despite improved short-term labour market indicators, households’ unemployment expectations remain elevated. In May 2021 the composite PMI employment indicator for the euro area continued to increase further in expansionary territory. The indicator has pointed to expanding employment since February of this year. More recently, the expectations of households about future unemployment conditions have improved. While unemployment expectations have declined since March 2021, they remain significantly above pre-pandemic levels.
Following a fall in private consumption in the first quarter, consumers have gradually become more optimistic, although their financial situation remains fragile. After a weak first quarter, when private consumption fell by 2.3%, consumer spending is expected to recover in the course of the second quarter even though this is not yet fully evident in a number of indicators released at the beginning of that quarter. In April 2021 the volume of retail trade shrank by 3.1% month on month, nonetheless standing 0.3% above its average level in the first quarter. Car registrations declined slightly in April (by 0.4% month on month), to more than 20% below their February 2020 levels. On the positive side, consumer confidence returned to its pre-pandemic level in May (-5.1 compared with ‑8.1 in April and -10.8 in March). The latest increases are largely attributable to households’ improving expectations about the general economic situation, while their assessment of their current personal financial situation is still well below pre-crisis levels. As the economy recovers, labour income should increasingly support household income, reducing its dependence on fiscal support. In April consumers also started saving less in bank deposits, in line with a gradual recovery of private consumption (see also Section 5). The European Commission’s Consumer Survey suggests that consumer spending will continue to rise over the next 12 months, while showing no signs of exuberance.
Corporate (non-construction) investment declined slightly in the first quarter of 2021, but a strong rebound is expected in the second quarter and for the remainder of the year. Supply-chain bottlenecks and a tightening of containment measures in some euro area countries contributed to a 0.4% quarter-on-quarter contraction in non-construction investment in the first quarter of the year, following an elevated quarterly growth rate in the last quarter of 2020. The first quarter decline reflects a strong reduction in investment in motor vehicles and a marked reversal of the strong investment in intellectual property products seen in the last quarter of 2020, which more than offset the strong growth in investment in other machinery. In the second quarter of 2021, short-term indicators suggest a marked and broadly-based strengthening across countries. In particular, survey data into May show a strong increase in confidence in the capital goods sector, reflecting buoyant demand and strong export orders following record-high production expectations in April. On the supply side, capacity utilisation in the capital goods sector was also well above the pre-pandemic level at the start of the second quarter and reported limits to production from shortages of equipment have increased sharply. For the year as a whole, survey data support the view of stronger business investment growth ahead. The latest Survey on the Access to Finance of Enterprises (SAFE), conducted in March and April 2021, points to a stabilisation in firms’ fixed investment decisions despite still elevated uncertainty and weaker corporate balance sheets. The April 2021 bi-annual European Commission Investment Survey foresees industrial investment growing by 7% in 2021 – around twice the rate expected in the November 2020 survey ‒ and mainly for extension and replacement purposes, rather than to rationalise production.
Housing investment increased further in the first quarter of 2021 and its overall positive trend is expected to continue going forward. Housing investment increased in the first quarter, rising by 0.5% quarter on quarter, falling short of its pre-crisis level in the last quarter of 2019 by 1.2%. Looking ahead, housing investment in the euro area is expected to continue on a positive trend, although the strength of the upward movement in the short term is likely to be limited by supply constraints. On the demand side, the European Commission’s survey data show that consumers’ short-term intentions to buy or build a house have reached their highest level since early 2003, while their intentions to renovate their homes reached their highest level on record. On the supply side, confidence in the construction sector continued to improve in April and May. The strong increase in companies’ assessments of the overall level of orders signals a robust demand for housing. At the same time, however, supply concerns have intensified. According to the European Commission’s survey data, construction companies faced historically high production limits in the first two months of the second quarter owing to scarcity of materials and labour shortages. Supply constraints are also reflected in the PMI surveys for the construction sector, which suggest that supplier delivery times rose markedly on average in April and May, compared with the first quarter of 2021. Moreover, firms’ business expectations for the coming year fell somewhat but remained in expansionary territory.
Euro area trade growth decreased in the first quarter of 2021 and resulted in a slightly positive net trade contribution to GDP. After sustained growth rates in the second half of 2020, the recovery of euro area exports slowed down in the first quarter of 2021 (+1.0% quarter on quarter). Disruptions as a result of Brexit together with shipping and input-related constraints exerted a drag. Nominal trade in goods data reveal that trade with the United Kingdom only partially recovered from the Brexit-related slump of January 2021, with nominal imports particularly affected and standing at 75% of their December 2020 level in March 2021. As regards other destinations, positive contributions to the growth of extra-euro area goods export volumes came from China. From a sectoral perspective, a slowdown is apparent across all categories except capital goods. Long delivery times and increasing freight rates, along with a shortage of intermediate inputs (such as chemicals, wood, plastic, metals and semiconductors), put a strain on the growth of euro area manufacturing exports (see Box 6). However, order-based forward-looking indicators signal a strong momentum ahead for goods exports. Trade in services shows some signs of improvement with the upcoming summer season and expectations for mobility easing that would support travel services exports. Imports increased broadly at the same pace as exports in the first quarter of 2021 (+0.9% quarter on quarter) and are expected to be sustained by the recovery of domestic demand in the coming quarters.
Incoming information points to a sizeable improvement in euro area activity in the second quarter of 2021. Survey data have improved, consistent with renewed robust growth in the second quarter of 2021. The recent strengthening has been broad-based across sectors as well as across countries. The composite output PMI, which rose from 48.1 in the fourth quarter of 2020 to 49.9 in the first quarter of 2021, has recently increased further, averaging 55.4 over April and May. This improvement reflects developments in both manufacturing and services ‒ both sectors are now generating survey results consistent with growth. Progress with vaccination campaigns appears to have spurred confidence further, particularly in services. Confidence has risen across all services sub-sectors, although it remains significantly below pre-pandemic levels in high-contact activities. The increase in confidence bodes well for the expected recovery of services, but the very large gap in comparison with pre-crisis levels of activity in high-contact sub-sectors suggests that they still suffer from ample spare capacity.
The ongoing COVID-19 pandemic has weakened growth in recent months, yet recovery is imminent, and a strong rebound is expected as of the second half of 2021. Notwithstanding an extension of stringent containment measures for much of the first half of 2021, learning effects, resilient manufacturing output and foreign demand, as well as support from monetary and fiscal policy, have contained output losses to a greater extent than in the first wave of the pandemic despite supply bottlenecks hampering production in some sectors. In the near term, an accelerated roll-out of vaccinations and concomitant declines in infection rates should allow a faster than previously expected unwinding of containment measures from their more stringent levels in the first half of 2021. This is reflected in the June 2021 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth of 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023 (Chart 12). Euro area activity is projected to return to growth in the second quarter of 2021 and, driven by a sharp rebound in private consumption and an easing of current supply chain disruptions, to pick up strongly in the second half of the year, allowing real GDP to exceed its pre-crisis level as of the first quarter of 2022.
Euro area real GDP (including projections)
4 Prices and costs
According to Eurostat’s flash release, annual euro area inflation rose to 2.0% in May 2021, up from 1.3% in March and 1.6% in April. That rise was mainly due to a strong increase in energy price inflation (reflecting sizeable upward base effects, as well as month-on-month increases), but also, to a lesser extent, a slight increase in non‑energy industrial goods inflation. Headline inflation is likely to increase further towards the autumn, mainly reflecting the reversal of the temporary VAT cut in Germany. Inflation is expected to decline again at the start of next year as the impact of temporary factors fades and global energy prices moderate. Underlying price pressures are expected to increase somewhat this year, owing to temporary supply constraints and the recovery in domestic demand. Nevertheless, price pressures are expected to remain subdued overall, partly reflecting low wage pressures, in the context of significant economic slack and the effects of the recent appreciation of euro exchange rates. When the impact of the pandemic fades, the unwinding of the high levels of slack will, supported by accommodative monetary and fiscal policies, contribute to a gradual increase in underlying inflation over the medium term. Survey and market-based indicators of longer-term inflation expectations remain at subdued levels, although market-based indicators have continued to increase.
This assessment is broadly reflected in the baseline scenario of the June 2021 Eurosystem staff macroeconomic projections for the euro area, which foresees annual HICP inflation of 1.9% in 2021, 1.5% in 2022 and 1.4% in 2023. Compared with the March 2021 ECB staff macroeconomic projections, the outlook for inflation has been revised upwards for 2021 and 2022, largely owing to temporary factors and increases in energy price inflation. It is unchanged for 2023, when the expected increase in underlying inflation is largely counterbalanced by an expected decline in energy price inflation. HICP inflation excluding energy and food is projected to stand at 1.1% in 2021, 1.3% in 2022 and 1.4% in 2023, with upward revisions being seen at all projection horizons relative to the March 2021 projection exercise.
According to Eurostat’s flash estimate, annual HICP inflation rose further in May. It stood at 2.0% in that month, up from 1.6% in April and 1.3% in March, mainly reflecting the further strengthening of energy inflation (Chart 13). Upward base effects associated with the strong declines observed in oil and energy prices in spring 2020 accounted for around half of the total increase seen in headline inflation between December 2020 and May 2021.
Headline inflation and its components
Developments in headline inflation in recent months also reflect the influence of other temporary factors. For instance, the changes to HICP weights at the start of this year resulted in strong increases in inflation in January, but that effect has more or less unwound in subsequent months (with April being the most recent month for which that calculation can be carried out). Similarly, the temporary surge in unprocessed food prices in April 2020 resulted in a downward base effect in April 2021, which offset some of the upward pressure from energy-related base effects (Chart 14). Calendar effects have also had an impact on inflation rates in recent months. For instance, services inflation rose to 1.1% in May, up from 0.9% in the previous month, partly on account of the timing of Easter and other holidays in that period. At the same time, changes in the timing and scope of sales periods in shops had a strong upward impact on non-energy industrial goods (NEIG) inflation in January and February, but that effect has since unwound, and the figure of 0.7% that was recorded in May – slightly above the long-term average of 0.6% – may be a better indication of the extent to which input costs have increased along the supply chain in recent months.
Contributions of base effects and other temporary factors to monthly changes in annual HICP inflation
Price imputations imply continued uncertainty surrounding the signal for underlying price pressures. According to provisional data from Eurostat, imputation shares declined only moderately between January and May, falling from 13% to 10% for the HICP and from 18% to 13% for the HICP excluding energy and food. This is mainly explained by the imputation share for services, which has been fairly stable at around one-fifth since November of last year as a result of the large shares for recreational and travel-related services. In contrast, the imputation share for NEIG items has declined considerably, falling from 17% in January to just 6% in May. However, given the greater weight attributed to services, these developments continue to imply a high degree of uncertainty surrounding the signal for underlying price pressures.
Measures of underlying inflation do not provide a broad-based signal pointing to a sustained rise in inflationary pressures (Chart 15). After increasing strongly in January, HICPX inflation declined considerably, falling to 0.9% in March and 0.7% in April, before rising to 0.9% in May. Those patterns in the first few months of 2021 were mainly attributable to developments in clothing, footwear and travel‑related services (including package holidays, accommodation services and air passenger transport). HICPXX inflation, which excludes those clothing and travel‑related items, has been more stable than HICPX inflation and stood at 1.2% in April (the latest figure available). Looking at other measures of underlying inflation, the Persistent and Common Component of Inflation (PCCI) stood at around 1.4% in April, broadly unchanged from March, whereas the Supercore measure declined moderately (falling from 1.0% to 0.9%) over the same period.
Measures of underlying inflation
Pipeline price pressures for non-energy industrial consumer goods continue to increase considerably – albeit mainly at earlier stages of the pricing chain thus far. In this respect, producer price inflation for intermediate goods has risen further, standing at 6.9% in April, 2.5 percentage points higher than in March and 4.4 percentage points higher than in February. Likewise, import price inflation for intermediate goods has increased substantially, standing at 7.1% in April, up from 4.6% in March and 1.5% in February. These developments probably reflect upward pressure from shipping costs, supply bottlenecks and high levels of commodity price inflation. These pressures are less visible at later stages of the pricing chain, in line with past experience of substantial buffering along the pricing chain. However, at 0.9% in March and 1.0% in April, domestic producer price inflation for non-food consumer goods has increased and moved above its long-term average of 0.6%. The impact that domestic producer prices are having on consumer goods inflation is, in part, being contained by the negative annual growth rates of import prices for non‑food consumer goods (-0.8% in April, down from -0.5% in March), which remain subdued owing to the impact of past exchange rate appreciation.
Growth in negotiated wages weakened substantially in the first quarter of 2021 (Chart 16). The 1.4% year-on-year growth seen in that quarter represents a substantial moderation relative to the rates recorded in the fourth quarter of 2020 (2.0%) and across 2020 as a whole (1.8%). As anticipated, COVID-19’s impact on negotiated wages did not become visible until wage agreements concluded before the onset of the pandemic had expired and new agreements were either delayed or concluded using lower wage rates. Given the possible coverage and timing issues, the negotiated wage growth seen in the first quarter may not necessarily be indicative of actual pay growth. Indicators of actual wage growth, such as compensation per employee (CPE) or compensation per hour (CPH), continue to be strongly affected by job retention and temporary lay-off schemes, which have an impact on pay and hours worked and tend to depress CPE and push up CPH. In the first quarter of 2021, the difference between the growth rates of those two indicators declined but remained significant. While annual CPE growth rose to 1.9% in the first quarter of this year, up from 1.0% in the fourth quarter of 2020, annual CPH growth fell from 5.2% to 3.2% over the same period.
Contributions made by components of compensation per employee
Market-based indicators of inflation compensation have continued to rise. Both shorter and longer-term market-based indicators of inflation compensation remain on an upward path, against the backdrop of improvements in risk sentiment and expectations regarding the unwinding of pent-up consumer spending, as well as the fiscal stimuli deployed around the globe. Long-term inflation risk premia are estimated to have increased considerably over the past few months, thereby accounting for the bulk of the overall increase in long-term inflation compensation. Improvements in expectations have been stronger at shorter horizons, resulting in the flattening of the inflation forward curve (Chart 17). The most prominent forward inflation-linked swap rate, the five-year inflation-linked swap rate five years ahead, stood at 1.56% on 9 June, up from 1.52% on 20 April. As regards survey-based measures, data from the ECB’s Survey of Professional Forecasters (SPF) and Consensus Economics indicate that average longer‑term inflation expectations for 2025 remained unchanged at 1.7% in April.
Survey and market-based indicators of inflation expectations
The June 2021 Eurosystem staff macroeconomic projections foresee inflation rising substantially in the course of 2021, before falling back at the beginning of 2022 and remaining broadly flat until the end of 2023. Annual HICP inflation is projected to average 1.9% in 2021, peaking at 2.6% in the fourth quarter, before averaging 1.5% and 1.4% in 2022 and 2023 respectively. The strong growth projected for 2021 reflects upward pressures from a number of temporary factors, including the reversal of the German VAT cut, a strong rebound in energy inflation (due to upward base effects) and an increase in input costs on account of supply constraints. Once the impact of those temporary effects has faded, HICP inflation is expected to be broadly flat in 2022 and 2023. The projected economic recovery and decreases in slack are expected to lead to a gradual increase in HICP inflation excluding energy and food, which is forecast to rise to 1.4% in 2023, up from 1.1% in 2021. Meanwhile, HICP food inflation is also projected to increase slightly over the projection horizon. However, the upward pressures that those two components exert on headline inflation are expected to be broadly offset in 2022 and 2023 by projected declines in energy inflation, given the downward-sloping profile of the oil price futures curve.
Euro area HICP inflation (including projections)
5 Money and credit
Money creation in the euro area moderated in April 2021, showing some initial signs of normalisation following the significant monetary expansion associated with the coronavirus (COVID-19) crisis. Domestic credit remained the dominant source of money creation, with Eurosystem asset purchases being the most prominent contributor. While the sizeable and timely measures implemented by monetary, fiscal and supervisory authorities continued to support the flow of credit to the euro area economy, growth in loans to the private sector moderated and returned to pre‑pandemic levels, driven by loans to firms. The total volume of external financing for firms rebounded in the first quarter of 2021. Meanwhile, the overall cost of firms’ external financing rose slightly in the first four months of the year, mainly on account of increases in the cost of equity, with the cost of market-based debt and bank lending also increasing marginally.
Broad money growth moderated in April 2021. The annual growth rate of M3 fell to 9.2% in April, down from 10.0% in March (Chart 19), on account of a relatively small monthly inflow and moderation in the growth of overnight deposits. In addition to a strongly negative base effect as the large inflows seen in the initial phase of the pandemic dropped out of the annual growth figures, the fall in M3 growth also reflected smaller inflows for households’ deposits and outflows for firms’ deposits. That decline in households’ accumulation of deposits coincided with an upturn in consumer confidence and supports expectations of an increase in consumer spending. Although the shorter-term dynamics of broad money moderated further, the pace of money creation remained high on the back of the support provided by monetary, fiscal and prudential policies. On the components side, the main driver of M3 growth was the narrow aggregate M1, which includes the most liquid components of M3. The annual growth rate of M1 fell to 12.3% in April, down from 13.6% in March, mainly as a result of developments in deposits held by firms and households. Other short‑term deposits and marketable instruments continued to make a limited contribution to annual M3 growth, reflecting the low level of interest rates and investors’ search for yield.
M3, M1 and loans to the private sector
Growth in overnight deposits moderated further. The annual growth rate of overnight deposits fell to 12.7% in April, down from 14.2% in March, driven mainly by the holdings of firms and households. In the case of firms, growth in deposit holdings varied across countries in April, reflecting differences in both the liquidity needs of firms and the support measures provided by national governments. Meanwhile, the annual growth rate of currency in circulation remained broadly stable at 9.8%. Overall, money holders’ strong preference for overnight deposits during the pandemic reflects precautionary motives, as well as the very low level of interest rates, which reduces the opportunity cost of holding such instruments.
Money creation continued to be driven by Eurosystem asset purchases. In April, the largest contribution to M3 growth came from the Eurosystem’s net purchases of government securities under the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP) (red portion of the bars in Chart 20). Further support for M3 growth came from credit to the private sector (blue portion of the bars). Bank credit to general government stopped making a positive contribution to money creation, owing to sales of government bonds and reduced issuance of government securities (light green portion of the bars). Net external monetary flows continued to have a slight dampening effect on money creation (yellow portion of the bars). Similarly, longer‑term financial liabilities and other counterparts also continued to dampen broad money growth (dark green portion of the bars), owing to developments in other counterparts, while favourable conditions for targeted longer‑term refinancing operations (TLTROs), which continued to support the substitution of bank funding, made a small contribution to M3 growth.
M3 and its counterparts
Growth in loans to the private sector declined in April, returning to the lower levels seen prior to the pandemic. The annual growth rate of bank loans to the private sector fell to 3.2% in April, down from 3.6% in March (Chart 19). This development was mainly explained by a decline in the annual growth rate of loans to firms, which fell to 3.2% in April, down from 5.3% in March, while the annual growth rate of loans to households increased to 3.8% in April, having stood at around 3.0% since June 2020 (Chart 21). The moderation in lending to firms in April should be interpreted in the light of various developments. It may have reflected a reduction in liquidity needs, as the sectors that have been most affected by the pandemic are showing signs of recovery. Another factor was the large lending flows seen in March 2021, which were partly explained by some banks frontloading in an attempt to hit the TLTRO lending performance benchmarks in order to benefit from the attractive conditions. Firms’ COVID-related reliance on longer‑term loans continued to increase at the expense of shorter-term loans.
MFI loans in selected euro area countries
Total lending to households picked up in April (Chart 21). This was mainly due to loans for house purchase, the annual growth rate of which (5.4%) was the highest since the start of the global financial crisis. At the same time, the annual growth rate of consumer credit turned positive, reflecting improvements in consumer confidence and spending possibilities, standing at 0.3% in April, up from -1.7% in March. However, households appear to have increased their spending primarily by drawing down deposits accumulated over the last year. Meanwhile, the annual growth rate of other lending to households remained broadly stable at 1.5% in April. Developments in this loan category, which are largely explained by lending to small firms (sole proprietors and unincorporated partnerships), have remained subdued despite slight improvements in recent months. Although governments have helped small firms to meet their financing needs, such companies have been particularly affected by the slowdown in economic activity.
The overall moderation in the growth of loans to firms masks some heterogeneity. According to the latest round of the ECB’s Survey on the Access to Finance of Enterprises in the euro area (SAFE), which covered the period from October 2020 to March 2021, fewer small and medium-sized enterprises (SMEs) reported improvements in the availability of loans in that period. A net 3% of respondent SMEs in the euro area signalled improvements in the availability of bank loans (down from 6% in the previous survey round). Micro companies were the most pessimistic in their assessment of the situation. Indeed, for the first time since mid‑2015, they signalled a decline in the availability of bank loans, whereas the responses of large companies suggested that availability had returned to pre‑COVID-19 levels. Meanwhile, a smaller net percentage of SMEs regarded the macroeconomic environment as having adversely affected their access to finance (Chart 22). That net percentage was comparable to the levels seen just before the onset of the pandemic and may reflect the beneficial effects of ongoing policy support measures. At the same time, a slightly smaller net percentage of SMEs signalled an improvement in banks’ readiness to provide credit. Similarly, a lower net percentage of SMEs reported improvements in access to public financial support, probably reflecting the declines observed in the use of guarantees towards the end of 2020. When asked specifically about government support schemes introduced in response to the pandemic, most respondent SMEs confirmed that they had had access to them over the last 12 months and that those schemes had helped them to meet their immediate and short-term obligations (see also Box 2 of this issue of the Economic Bulletin).
Changes in factors with an impact on the availability of external financing to euro area SMEs
Banks have continued to benefit from favourable funding conditions, while rising credit risk is weighing on their intermediation capacity. The composite cost of debt financing for euro area banks remains below its pre-pandemic level, owing to sizeable monetary policy support and the continued support of governments and regulatory authorities (Chart 23), notwithstanding an increase in bank bond yields since the beginning of 2021. The ECB’s APP and PEPP have placed downward pressure on yields, and banks have replaced some market-based funding with TLTROs at very favourable conditions. Both factors have also supported market conditions for bank bonds. Moreover, prices for covered bank bonds are being directly supported by the ECB’s third covered bond purchase programme (CBPP3). Meanwhile, euro area banks’ deposit rates remained broadly unchanged at historical lows in April 2021, thereby contributing to favourable debt funding conditions amid the effective pass-through of negative rates. Indeed, euro area banks have, since the onset of the pandemic, increasingly charged negative interest rates on NFCs’ deposits. At the same time, banks’ ability to charge negative rates is dependent on their market power, and rates on retail deposits from households have tended to remain at or above zero, which compresses banks’ net interest margins. While banks continued to strengthen their loss-absorption capacity in the fourth quarter of 2020 by increasing their capitalisation, rising credit risk and low bank profitability may hamper banks’ ability to supply credit. As the April 2021 euro area bank lending survey showed, banks continued to tighten their credit standards in the first quarter of 2021 (albeit only on loans to firms and less than in the two previous quarters), reflecting an increase in their perception of risk and a decline in their tolerance of risk as a result of the pandemic.
Composite cost of debt financing for banks
Bank lending rates for loans to NFCs rose, but remained low. In April 2021 the composite bank lending rate for loans to NFCs increased by 17 basis points to stand at 1.56%, after declining in the first quarter of the year, while the corresponding rate for loans to households for house purchase remained unchanged at a historical low of 1.31% (Chart 24). These developments reflect the ongoing impact of the policy measures that have been implemented by the ECB, supervisory authorities and national governments in support of credit supply conditions, particularly for the firms that have been worst affected by the pandemic. The spread between bank lending rates on very small loans and rates on large loans has stabilised at pre-pandemic levels. At the same time, uncertainty regarding the pandemic’s longer-term impact on the economy – and thus borrowers’ creditworthiness and banks’ balance sheets – remains high. All existing policy support measures remain essential in order to prevent that uncertainty from precipitating a broad-based tightening of financing conditions, amplifying the economic impact of the pandemic.
Composite bank lending rates in selected euro area countries
The total volume of external financing for firms rose slightly in the first quarter of 2021. The annual growth rate of external financing stood at 4.5% in March 2021, with the shorter-term dynamics of financing reversing the downward trend that began to be observed at the end of last summer. These flows have been driven mostly by borrowing from banks and, to a lesser extent, net issuance of listed shares (panel (a) of Chart 25). Firms have reduced their market-based borrowing, while external financing flows have continued to benefit from favourable financing conditions. The motives underlying borrowing from banks are heterogeneous across sectors: export‑oriented sectors are likely to have benefited from improved global conditions, and construction activity has been buoyant in some countries, while other sectors more exposed to the fallout from the pandemic have needed higher levels of liquidity.
The total nominal cost of external financing for NFCs (comprising bank lending, debt issuance in the market and equity finance) remained low, but increased slightly. It stood at 4.6% at the end of April (panel (b) of Chart 25), around 30 basis points below the peak seen in March 2020 and 50 basis points higher than the historical low observed in June 2020. The slight increase seen in the overall cost of financing in the first four months of 2021 was related to the higher cost of equity, which reflected increases in both risk-free rates and the equity risk premium. At the same time, the further compression of corporate bond spreads offset those increases in risk-free rates, so the cost of market-based debt remained virtually unchanged overall. The cost of bank lending – primarily long-term lending – also increased slightly. Between the end of April and 9 June 2021, the overall cost of financing is estimated to have increased by a further 35 basis points or so, primarily on account of an increase in the cost of equity. This was due to a slight increase in the equity risk premium, following an exceptionally strong rise in long-term corporate earnings expectations (as also evidenced by business surveys), while discount rates remained at low levels overall. With earnings expectations increasing so strongly and discount rates remaining low, models would normally have expected equity prices to increase somewhat more strongly than they did, which is therefore mechanically reflected in a slightly higher risk premium. Over the same period, the cost of market‑based debt increased only marginally – with higher risk-free rates being almost entirely offset by the further compression of corporate bond spreads – in both the investment grade and the high‑yield segments.
External financing of euro area NFCs
6 Fiscal developments
As a result of the very sharp economic downturn during the coronavirus (COVID-19) pandemic and the strong fiscal reaction, the general government budget deficit in the euro area increased strongly, to 7.3% of GDP in 2020 from 0.6% in 2019. This year, as new waves of the pandemic have hit euro area countries, many emergency measures have been extended and additional recovery support has been put in place. As a result, the June 2021 Eurosystem staff macroeconomic projections foresee only a marginal improvement in the general government budget balance in the euro area to -7.1% of GDP in 2021. However, as the pandemic abates and the economic recovery takes hold, the deficit ratio is expected to fall more swiftly, to 3.4% in 2022 and 2.6% at the end of the projection horizon in 2023. Euro area debt is projected to peak at just below 100% of GDP in 2021 and to decline to around 95% of GDP in 2023, which is about 11 percentage points higher than before the coronavirus crisis. Nonetheless, an ambitious and coordinated fiscal stance remains crucial, as a premature withdrawal of fiscal support would risk weakening the recovery and amplifying the longer-term scarring effects. National fiscal policies should thus continue to provide critical and timely support to the firms and households most exposed to the ongoing pandemic and the associated containment measures. At the same time, fiscal measures should remain temporary and countercyclical, while ensuring that they are sufficiently targeted in nature to address vulnerabilities effectively and to support a swift recovery in the euro area economy. As a complement to national fiscal measures, the Next Generation EU (NGEU) package is expected to play a key role by contributing to a faster, stronger and more uniform recovery. It should increase economic resilience and the growth potential of EU economies, particularly if the funds are used for productive public spending and are accompanied by productivity-enhancing structural policies. According to the June macroeconomic projections, the combination of NGEU grants and loans should provide additional stimulus of around 0.5% of GDP per year between 2021 and 2023.
According to the June 2021 Eurosystem staff macroeconomic projections, the euro area general government budget balance will improve only marginally in 2021, but should recover strongly as of 2022. The general government deficit ratio for the euro area increased from 0.6% of GDP in 2019 to 7.3% of GDP in 2020, the largest deficit since the introduction of the euro. It is projected to decline only marginally to 7.1% in 2021, but then more strongly to 3.4% in 2022 and 2.6% in 2023 (Chart 26). The rise in the budget deficit in 2020 was largely attributable to a deterioration in the cyclically adjusted primary balance on the back of economic support measures in response to the pandemic amounting to around 4% of GDP. The crisis and recovery support is now projected to increase to about 4½% of GDP in 2021. This reflects the fact that governments have prolonged emergency measures, gradually expanded their size and/or adopted new ones to support the recovery, including measures to be funded through NGEU. The deficit increase last year was also partly the result of a large negative cyclical component, which is expected to start declining, albeit only marginally, in 2021. The more significant improvement in the budget balance from 2022 onwards is projected to be driven by a higher cyclically adjusted primary balance, as a large share of the emergency measures (which are not funded by NGEU grants) will expire. Moreover, the contribution from the economic cycle is expected to increase swiftly as of 2022. To a lesser extent, but over the whole projection horizon, the improvement in the budget balance will also be helped by gradually falling contributions from interest payments.
Budget balance and its components
The euro area projections include NGEU grants of around 0.6% of GDP in each year of the projection horizon which, together with a limited amount of loans, are assumed to finance 0.5% of GDP of additional stimulus per year. NGEU grants incorporated in the projections amount to about 1¾% of GDP over the period 2021-23. Together with loans of about 0.3% of GDP, NGEU is assumed to finance close to 1.9% of GDP of spending, of which slightly more than 1.5% of GDP would go to additional stimulus, while the rest would be used to finance existing plans.
The aggregate fiscal stance was highly expansionary in 2020 and is projected to remain expansionary in 2021. A tightening of the fiscal stance from the very high levels of support is expected to take place in 2022 as the fiscal support fades along with the expiry of pandemic and temporary support measures. In 2023 the fiscal stance is projected to be broadly neutral. This notwithstanding, the level of fiscal support to the economic recovery remains large over the whole projection horizon, which is reflected in the overall primary fiscal balance remaining firmly negative, improving only gradually from -5.8% in 2021 to -1.5% of GDP in 2023.
In addition to the fiscal support for their economies, euro area countries have provided sizeable loan guarantee envelopes to bolster the liquidity positions of firms. In total, these guarantee envelopes amount to around 19% of GDP for the euro area in 2021, with the size of the envelope and the take-up rate differing substantially across countries. The loan guarantees are contingent liabilities for governments and any calls on the guarantees will therefore constitute additional public spending that increases government debt.
The budget balance in 2021 is now projected to be significantly lower than previously projected in the March 2021 ECB staff macroeconomic projections, and the outlooks for 2022 and 2023 have also been revised down somewhat. Specifically, the euro area general government budget balance as a share of GDP has been revised down by 1.0 percentage points for 2021 and by 0.2 and 0.3 percentage points, respectively, for the subsequent two years. These revisions are due to the higher discretionary fiscal measures in response to the pandemic, particularly in 2021, which are only partly compensated by a stronger contribution from the economic cycle. The projected interest payments remain broadly the same as in the March projections.
The euro area aggregate public debt-to-GDP ratio increased strongly in 2020 and is projected to peak at just below 100% in 2021, before declining gradually to about 95% in 2023. The 14 percentage point increase in the debt ratio in 2020 reflects a combination of a high primary deficit and a very adverse interest-growth differential, but also a significant deficit-debt adjustment owing to, among other things, liquidity support in response to the pandemic. In 2021 a still high primary deficit will be only partly compensated by a significant debt-reducing contribution from the interest-growth differential. In 2022 and 2023, however, the debt ratio will start falling as smaller primary deficits are more than offset by favourable contributions from interest-growth differentials and, to a lesser extent, by negative deficit-debt adjustments (Chart 27). As a result, at the end of the projection horizon in 2023, the debt-to-GDP ratio is expected to be around 11 percentage points above its pre-crisis level. It should, however, be noted that the coronavirus crisis has had a somewhat smaller adverse impact on the debt path than was generally expected in the initial phase of the crisis.
Drivers of change in euro area government debt
National fiscal policies should continue to provide critical and timely support to the firms and households most exposed to the ongoing pandemic and the associated containment measures. A premature withdrawal of fiscal support would risk weakening the recovery and amplifying the longer-term scarring effects. At the same time, fiscal measures should remain temporary and countercyclical, while ensuring that they are sufficiently targeted in nature to address vulnerabilities effectively and to support a swift recovery in the euro area economy. Fiscal sustainability will be helped by the expected economic recovery and, importantly, also by financing conditions, which should continue to be supportive. It remains essential, however, that Member States gradually reduce budgetary imbalances once economic activity has sufficiently recovered. This process can be amplified by a decisive shift towards a more growth-friendly composition of public finances and structural reforms that raise the growth potential of euro area economies, as also put forward in the Commission’s recommendations for fiscal policies issued on 2 June (for details, see the box entitled “Implications of the 2021 stability programmes for fiscal policies in the euro area” in this issue of the Economic Bulletin). NGEU’s Recovery and Resilience Facility can provide important support in this respect, not least by accelerating the green and digital transitions.
1 Developments in the euro area current account during the pandemic
Amid elevated volatility in economic activity and international trade due to the coronavirus (COVID-19) pandemic, the euro area current account surplus narrowed only slightly in 2020 compared with 2019, from 2.3% to 2.2% of GDP (Chart A, panel a). However, the moderate decrease in the current account surplus in relation to GDP masks a sizeable decline in its value, from €280 billion in 2019 to €250 billion in 2020, as nominal GDP fell sharply over this period, Moreover, pronounced shifts took place in the trade composition and geographic breakdown of the surplus, as well as in the underlying gross external (credit and debit) transactions. This box reviews the main developments in the euro area current account in 2020, with a focus on how the pandemic affected its various components.More
2 The impact of fiscal support measures on the liquidity needs of firms during the pandemic
European governments responded to the outbreak of the coronavirus (COVID-19) pandemic by deploying large fiscal packages with the aim of supporting households, workers and firms. After nearly a year of fiscal support, information on how these packages have been used during this time to help firms’ liquidity needs in the short and medium term was gathered through the survey on the access to finance of enterprises (SAFE). The government fiscal measures are classified into three main groups: i) payroll support; ii) tax cuts and tax moratoria; and iii) other types of support. This box provides a summary of the survey results, grouping the outcomes for individual countries in four distinct sectors (industry, construction, wholesale and retail trade, and other business services).More
3 Liquidity conditions and monetary policy operations in the period from 27 January to 27 April 2021
This box describes the ECB’s monetary policy operations and euro area liquidity developments during the first and second reserve maintenance periods of 2021. Together, these two maintenance periods lasted from 27 January to 27 April (the “review period”).
The level of central bank liquidity in the banking system continued to rise during the review period. This was largely due to net asset purchases conducted under the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP), as well as the settlement of the seventh operation in the third series of targeted longer-term refinancing operations (TLTRO III). On 11 March, the Governing Council announced that it expected purchases under the PEPP to be conducted at a significantly higher pace over the second quarter than during the first months of the year. During the review period, net autonomous liquidity factors remained at levels broadly similar to those seen during the previous review period, which ran from 4 November 2020 to 26 January 2021.More
4 The impact of the COVID-19 crisis on the euro area labour market for men and women
In the euro area, based on data available up to the fourth quarter of 2020, the coronavirus (COVID-19) crisis led to a decline in the labour force, a fall in employment and an increase in unemployment, with different developments for men and women across time. Employment in the euro area decreased by around 3.1 million workers between the fourth quarter of 2019 and the fourth quarter of 2020 (Chart A). Around 1.9 million of these workers are estimated to be men and roughly 1.2 million are estimated to be women. This implies a total decline in employment of 2.2% for men and 1.5% for women over this period. Unemployment increased by 0.9 million over the same period, with 495,000 men and 388,000 women becoming unemployed. In total, there was an 8.0% increase in male unemployment and a 6.6% increase in female unemployment between the fourth quarter of 2019 and the fourth quarter of 2020. The percentage rise in unemployment during this period peaked in the third quarter of 2020, at 10.5% for men and 12.8% for women. Then, during the fourth quarter of 2020, the number of women unemployed decreased more than the number of men unemployed. The large decline in employment was not accompanied by corresponding increases in unemployment for either gender, with 2.2 million people becoming inactive between the fourth quarter of 2019 and the fourth quarter of 2020, of which 1.4 million were men and 0.8 million were women. While female labour force participation was more affected during the first wave of the pandemic, up to the second quarter of 2020, it recovered at a faster pace during the second half of the year.More
5 Euro area house price developments during the coronavirus pandemic
Aggregate euro area house price dynamics have remained robust during the coronavirus (COVID-19) pandemic. Year-on-year house price growth increased from 4.3% at the end of 2019 to stand at 5.8% in the last quarter of 2020 – the highest growth rate since mid-2007. This box reviews recent developments in euro area house prices and their relation to macroeconomic conditions from different angles (across countries, types of housing and location).More
6 The semiconductor shortage and its implication for euro area trade, production and prices
The semiconductor industry has recently seen a strong surge in demand. Revenues from global sales of semiconductors have almost doubled over the past decade and the Asian economies have consolidated their market dominance in this regard (Chart A). Looking at imports, the share of Chinese imports of semiconductors appears to be growing compared to that of the EU and the United States. At the onset of the COVID-19 pandemic, while sales of semiconductors to the motor vehicle industry collapsed globally during the second quarter of 2020, this shortfall was more than offset by a strong demand for computer and electronic equipment owing to the shift to remote working and distance learning. Once the global recovery took hold, the production of semiconductors was not sufficient to meet the surge in demand from the motor vehicle industry. In addition, various adverse events, such as fires and droughts affecting large manufacturing plants aggravated the global supply shortage of semiconductors.More
7 Implications of the 2021 stability programmes for fiscal policies in the euro area
The stability programmes for the period 2021-24 for the first time provide comprehensive details of the euro area countries’ medium-term budgetary plans in response to the coronavirus (COVID-19) pandemic. Last year, given the newness of the major health crisis and the extreme uncertainty associated with it, euro area governments mostly abstained from submitting detailed fiscal plans. The updated programmes, which were submitted at the end of April 2021, were prepared by governments in the knowledge that the general escape clause of the Stability and Growth Pact (SGP) would remain active until at least the end of 2021, allowing them to deviate from the SGP’s adjustment requirements. Furthermore, the programmes were supposed to reflect the country-specific recommendations (CSRs) adopted by the European Council on 20 July 2020 for the period 2020-21, which did not include numerical budgetary adjustment requirements, but instead called for fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability “when economic conditions allow”. For the near term, it was recommended that governments “take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery”. Finally, the programmes are a first reflection of the recovery and resilience plans that Member States had to submit by 30 April outlining the reforms and projects they intend to implement using the funds available through the Next Generation EU (NGEU). Against this background, this box reviews euro area countries’ medium-term budgetary plans for exiting the current crisis and points to remaining challenges arising from the recommendations for fiscal policies issued by the European Commission on 2 June in its 2021 European Semester Spring Package.More
1 Globalisation and its implications for inflation in advanced economies
The globalisation of inflation hypothesis argues that the factors influencing inflation dynamics are becoming increasingly global. In recent years, economists have started to reassess the predictive power of standard inflation models (e.g. the Phillips curve) and to increasingly look at global factors, including globalisation, as a possible explanation behind the reduced sensitivity of inflation to domestic determinants (the so-called globalisation of inflation hypothesis). Accordingly, in addition to domestic measures of slack, standard models of inflation should account for the role of global factors over and beyond their impact via import prices.More
© European Central Bank, 2021
Postal address 60640 Frankfurt am Main, Germany
Telephone +49 69 1344 0
All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.
This Bulletin was produced under the responsibility of the Executive Board of the ECB. Translations are prepared and published by the national central banks.
The cut-off date for the statistics included in this issue was 9 June 2021.
For specific terminology please refer to the ECB glossary (available in English only).
PDF ISSN 2363-3417, QB-BP-21-004-EN-N
HTML ISSN 2363-3417, QB-BP-21-004-EN-Q
- For further details, see Section 5 entitled “Alternative scenarios for the euro area economic outlook” in the June 2021 Eurosystem staff macroeconomic projections for the euro area.
- The methodology for calculating 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.
- See “Survey on the Access to Finance of Enterprises”, ECB, 1 June 2021.
- See also the section entitled “Corporate solvency challenges could weigh on sovereigns, households and creditors”, Financial Stability Review, ECB, May 2021.
- See Box 4 of the article entitled “Eurosystem staff macroeconomic projections for the euro area, June 2021”, published on the ECB’s website on 10 June 2021.
- For more information on the impact that base effects have on energy inflation, see the box entitled “Recent dynamics in energy inflation: the role of base effects and taxes”, Economic Bulletin, Issue 3, ECB, 2021.
- The coronavirus (COVID-19) pandemic triggered significant changes in household spending in 2020. Those shifts are reflected in the 2021 HICP weights – and, therefore, the resulting annual inflation figures. For analysis of the complexity of this impact, see the box entitled “2021 HICP weights and their implications for the measurement of inflation”, Economic Bulletin, Issue 2, ECB, 2021.
- For details of potential commonality in travel-related items affected by COVID-19 lockdowns, see the box entitled “Prices for travel during the COVID-19 pandemic: is there commonality across countries and items?”, Economic Bulletin, Issue 1, ECB, 2021.
- For a stylised overview of the supply price chain for HICP non-energy industrial goods, see the box entitled “What can recent developments in producer prices tell us about pipeline pressures?”, Economic Bulletin, Issue 3, ECB, 2017.
- For detailed analysis of the indicator of negotiated wages, including details of recent developments and the role that the indicator plays in assessing and forecasting wage developments at the current juncture, see the box entitled “Assessing wage dynamics during the COVID-19 pandemic: can data on negotiated wages help?”, Economic Bulletin, Issue 8, ECB, 2020.
- See the “Eurosystem staff macroeconomic projections for the euro area, June 2021”, published on the ECB’s website on 10 June 2021.
- The euro area budget balance for 2020 has been updated compared to the Eurostat data release of 22 April 2021 (first notification at -7.2% of GDP) following an update of the data for Germany.
- The fiscal stance reflects the direction and size of the stimulus from fiscal policies to the economy beyond the automatic reaction of public finances to the business cycle. It is measured here as the change in the cyclically adjusted primary balance ratio net of government support to the financial sector. Given that the higher budget revenues related to NGEU grants from the EU budget do not have a contractionary impact on demand, the cyclically adjusted primary balance is in this context adjusted to exclude those revenues. Note also that the euro area fiscal projections referred to in this section do not include the European supranational deficit and debt related to NGEU transfers. For more details on the concept of the euro area fiscal stance, see the article entitled “The euro area fiscal stance”, Economic Bulletin, Issue 4, ECB, 2016.
- The fiscal stance is assessed at -4.2 percentage points of GDP in 2020 and is projected to be -1, +2.1 and +0.1 percentage points of GDP in 2021, 2022 and 2023, respectively, after adjustment for revenues related to NGEU grants.
- The biannual SAFE was conducted between 8 March and 22 April 2021. Euro area firms were asked to report on changes in their financial situation and on the need for and availability of external financing during the period between October 2020 and March 2021. The total sample size was 11,007 firms, of which 10,054 (91%) are SMEs. All figures in this box are weighted by size class, economic activity and country to reflect the economic structure of the underlying population of firms. See the SAFE report.
- Payroll support refers to government subsidies in the form of subsidised wages for employees who temporarily saw a full or partial reduction of their working hours, so-called short-time work schemes.
- Although not specified in the questionnaire, this third category might include several schemes related to government support, such as bank loan guarantees not used for the wage bills, direct financial aid, recapitalisation and restructuring funds. See also the box entitled Government support policies during the COVID-19 period in the SAFE report for further details on the ad hoc questions introduced in the SAFE.
- This box complements related assessments of government schemes. Albertazzi et al. assess how the announced public loan guarantee schemes might affect the scale of losses that banks may face. Falagiarda et al. discuss the characteristics of these schemes and their take-up across the larger euro area countries. Anderson et al. provide a summary of the credit support measures in Europe’s five largest economies. A 2021 OECD study provides a summary of liquidity and structural support measures globally. See Albertazzi, U., Bijsterbosch, M., Grodzicki, M., Metzler, J. and Ponte Marques, A., “Potential impact of government loan guarantee schemes on bank losses”, Financial Stability Review, ECB, May 2020; Falagiarda, M., Prapiestis, A. and Rancoita, E., “Public loan guarantees and bank lending in the COVID-19 period”, Economic Bulletin, Issue 6, ECB, 2020; Anderson, J., Papadia, F. and Véron, N., “COVID-19 credit-support programmes in Europe’s five largest economies”, Working Paper, 03/2021, Bruegel, 2021; and One year of SME and entrepreneurship policy responses to COVID-19: Lessons learned to “build back better”, OECD, April 2021.
- The employment and total hours worked aggregates are based on the Eurostat national accounts data, whereas the information on unemployment and the gender composition of employment and hours worked are retrieved from Eurostat’s quarterly EU labour force survey. The gender-specific effects on employment and hours worked are mapped at the sectoral and aggregate levels from the labour force survey to the national accounts data. This implicitly assumes that the gender distribution in the euro area as calculated using the labour force survey also broadly holds for the national accounts data. In this box, the terms “usual hours worked” and “contractual hours worked” are used interchangeably.
- Up to the third quarter of 2020, the decline in employment for men and women was broadly equal at around 2.3% for men and 2.2% for women cumulatively from the fourth quarter of 2019.
- The general escape clause was activated in March 2020 and extended to 2021 in September 2020. It allows Member States to depart from the SGP’s adjustment requirements in certain specific situations, such as in periods of a severe economic downturn for the euro area or the Union as a whole. For further details, see Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank – Annual Sustainable Growth Strategy 2021, COM(2020) 575 final.
- See Auer, R., Borio, C. and Filardo, A., “The globalisation of inflation: the growing importance of global value chains”, BIS Working Papers, No 602, Bank for International Settlements, January 2017.