Press Release - Europe’s economic recovery: challenges and opportunities for the banking sector - Remarks by Peter Praet, Member of the Executive Board of the ECB, at the Association of Banks in Bulgaria - Sofia, 24 May 2017
Europe’s economic recovery
Since June 2014, the ECB has introduced a range of unconventional measures, alongside our conventional ones, in pursuit of its price stability objective. Together, these measures have proved to be extremely effective in preventing a period of disinflation from spiralling into one of deflation.
Nearly three years on, the risks of deflation have vanished and the transmission of our policy measures to the real economy is clearly evidenced by the strengthening cyclical recovery – a recovery that has shown a remarkable resilience to external shocks.
Before turning to price developments and monetary policy, let me say a bit more about the latest economic developments in the euro area.
The upswing is becoming increasingly solid, and continues to broaden across sectors and countries. Real GDP in the euro area has expanded for 16 consecutive quarters, growing by 1.7% year-on-year during the first quarter of 2017, according to Eurostat’s flash estimate. This compares with the latest potential growth estimates for the euro area of around 1%.[1] Moreover, recent survey data point to a strong start to the second quarter. For example, the composite output Purchasing Managers’ Index – which is strongly correlated with growth in the euro area – hit a six-year high in April and the forward-looking components of the survey point to growth in the quarters ahead. Moreover, economic sentiment is now at its highest level in nearly a decade and unemployment is at its lowest level in eight years.
The breadth of the economic recovery is also notable. The dispersion of growth rates across both countries and sectors is at its lowest level in two decades, reflecting a convergence of growth rates around higher levels. This is reassuring for the growth outlook because recoveries tend to be firmer and more robust when they are broad-based. It’s a similar picture for employment, with dispersion of employment growth rates across euro area countries at its lowest level on record.
The increasingly solid cyclical recovery reflects the success of our monetary policy measures, which have worked their way through the financial system and led to a significant easing of financing conditions for consumers and firms. Together with improving financial and non-financial sector balance sheets, this has strengthened credit dynamics and supported domestic demand.
Since June 2014, bank lending rates for both euro area households and non-financial corporations have fallen by around 110 basis points. Lending rates for very small loans, which can be taken as a proxy for loans to small and medium-sized enterprises (SMEs), have declined by over 180 basis points. The significant improvement in funding conditions for SMEs is especially encouraging as they provide two-thirds of total private sector employment in the euro area. Heterogeneity of lending rates across countries has also fallen sharply, indicating that our non-standard measures have been particularly effective in counteracting bank funding and financial fragmentation in some jurisdictions. For example, the difference between the median lending rate for firms in countries that were severely affected by the crisis versus other countries has narrowed by about 100 basis points over this three-year period.
The sharp reduction in bank lending rates has been accompanied by easier access to funding, as recent surveys have shown.[2] These positive developments have been supported by the second series of targeted longer-term refinancing operations, as a result of which banks are passing on the favourable funding conditions to their customers.[3] Moreover, these improvements are not limited to interest rates: bank lending volumes have also been gradually recovering since early 2014. Market-based funding conditions, too, have improved significantly in response to the corporate sector purchase programme launched in June 2016.
The easing of financing conditions has underpinned the recovery in domestic demand, which is now the mainstay of growth in the euro area. As the unemployment rate continues to decline despite a rise in labour force participation, households’ real disposable income is improving. Given the broadly stable savings rate, increased labour income is translating into higher private consumption expenditure. Business investment is also picking up as a result of the favourable financing conditions, the need to modernise the capital stock after years of subdued investment and strengthening corporate profitability.
From today’s point of view, there are signs of a stronger global recovery and a pick-up in international trade. The more synchronised economic upswing across regions should further support the euro area recovery.
As for price developments, after hovering at levels well below 1% for three years, with occasional dips into negative territory, euro area headline inflation has again edged higher towards the end of last year and reached 1.9% in April. This upward movement of inflation mainly reflects increases in energy and food prices. Underlying inflation – which relates more to domestic price pressures – continues to remain subdued, as unutilised resources still weigh on wage and price growth. In fact, the annual rate of HICP inflation excluding food and energy has mostly remained below 1% since late 2013.
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