Publication - 07 February 2019 - Update on economic and monetary developments
Summary
The incoming information that has become available since the Governing Council’s decision to end net asset purchases in December 2018 has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors. In particular, the persistence of uncertainties relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment.
At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. This underlying strength of the economy supports the Governing Council’s confidence in the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Nevertheless, significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This will be provided by the Governing Council’s forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets. The Governing Council confirmed that it stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
The global economic growth momentum has slowed recently amid geopolitical uncertainties and vulnerabilities in emerging markets. Global trade decelerated towards the end of 2018 as downside risks related to unresolved trade disputes remained prominent and growth in emerging markets slowed down. While financial conditions are favourable overall, the weaker global growth momentum has fuelled stock market volatility. A more accommodative monetary policy stance has been taken in China in the light of the slowing growth momentum.
Euro area government bond yields declined somewhat as global risk-free rates decreased and sovereign bond spreads in the euro area remained stable. Despite heightened intra-period volatility, equity prices in the euro area stayed, overall, broadly unchanged. Similarly, yield spreads on corporate bonds increased only modestly. In foreign exchange markets, the euro depreciated in trade-weighted terms.
Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. Incoming data have continued to be weaker than expected resulting from a slowdown in external demand which was compounded by several country and sector-specific factors. While the impact of some of these factors is expected to fade, the near-term growth momentum is likely to be weaker than previously anticipated. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, lower energy prices, and the ongoing – albeit somewhat slower – expansion in global activity.
Euro area annual HICP inflation declined to 1.6% in December 2018, from 1.9% in November, reflecting mainly lower energy price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline further over the coming months. Measures of underlying inflation remain generally muted, but labour cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by the ECB’s monetary policy measures, the ongoing economic expansion and rising wage growth.
Overall, the risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
The monetary analysis shows that broad money (M3) growth decreased to 3.7% in November 2018, after 3.9% in October. M3 growth continues to be backed by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth. The annual growth rate of loans to non-financial corporations stood at 4.0% in November 2018, after 3.9% in October, while the annual growth rate of loans to households remained broadly unchanged at 3.3%. The euro area bank lending survey for the fourth quarter of 2018 suggests that overall bank lending conditions remained favourable, following an extended period of net easing, and demand for bank credit continued to rise, thereby underpinning loan growth.
The outcome of the economic analysis and the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Based on this assessment, the Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, the Governing Council confirmed that the Eurosystem will continue to reinvest, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
External environment
Economic indicators signal a moderation in global growth momentum. The global composite output Purchasing Managers’ Index (PMI) excluding the euro area weakened in late 2018 (see Chart 1), mainly owing to a continued deceleration in global manufacturing activity. The services sector remained more resilient than manufacturing, notwithstanding some volatility in the figures. Consumer confidence has declined recently, albeit from high levels.
Downside risks to global activity have been increasing and a further escalation of trade disputes could weigh on global growth. While the postponement of further tariff increases by the United States and China has sent a positive signal, considerable uncertainty remains as to whether the negotiations will lead to a significant de-escalation of US-Chinese trade tensions. Other downside risks relate to a faster tightening of global financial conditions and broader stress in emerging markets, uncertainties regarding China’s economic prospects, as well as political and geopolitical uncertainties, including risks related to Brexit.
Financial conditions remain accommodative overall, while concerns over US and global economic activity have fuelled stock market volatility. In China, fiscal policy and monetary policy have eased in response to a weakening, in particular, of the manufacturing sector. Market expectations of further interest rate increases in the United States have eased somewhat, amid a further decline in Treasury yields, partly reflecting developments in term premia. Looking ahead, the Federal Open Market Committee (FOMC) is proceeding with its gradual policy normalisation, albeit against a more cautious economic outlook and a slightly lower interest rate path projection.
Global trade momentum decelerated towards the end of 2018. Global merchandise imports weakened in October, while in December the global PMI for new export orders pointed, for the fourth consecutive month, to a contraction (see Chart 2). High frequency trade data for China weakened considerably towards the end of 2018, possibly signalling that the trade tensions between the United States and China are affecting manufacturing sentiment in both economies and are adversely impacting global trade growth.
Copyright: European Central Bank
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