Economic developments in the euro area developments in the euro area Société Royale d’Economie...

Economic developments in the euro area

Société Royale d’Economie Politique

17 September 2018

Peter PraetMember of the Executive Board

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Sources: ESCBNote: the years in brackets correspond to peak year of financial assistance impact. No impact in EE, MT, SK and FI.Latest observation: 2018.

Assistance to financial sector since 2007: impact on the debt(cumulative, in percent of GDP)

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Sources: ESCBNote: The years in brackets correspond to peak year of financial assistance impact. No impact on contingent liabilities in EE, MT,SK and FI. In IE, the increase in contingent liabilities on account of financial sector assistance also includes a guarantee on deposits.Latest observation: 2018.

Assistance to financial sector since 2007: contingent liabilities(cumulative, in percent of GDP)

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Sources: European Commission and ECB calculationsLatest observation: 2018.

Actual GDP and pre-crisis trend in the euro area(Index, 1999=100)

90

100

110

120

130

140

150

1999 2003 2007 2011 2015

Actual output

Potential output: current estimate (European Commission)

Potential output: linear projection

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www.ecb.europa.eu©2018-09-17 – Societe Royale d’Economie Politique

2007

2008

2009

20102011

201220132014

2015

20162017

2018

60

65

70

75

80

85

90

95

0 1 2 3 4 5 6 7

Gro

ss d

ebt

Deficit

5

Source: ESCB

Euro area deficit and gross debt trajectory (percentage of GDP)

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Global PMI

Sources: Markit, Haver Analytics, ECB staff calculations.Notes: ECB staff calculations for the aggregate advanced economies excluding the euro area,comprising US, Japan and UK. Latest observation: August 2018.

Composite output PMIs: euro area, advanced economies and EMEs

(diffusion index; SA; monthly data)

Sources: Markit, ECB staff calculations.Note: Long-term average refers to 1999 onwards. Latest observation: 2018Q2 for PMI and for global GDP. Forecast from September 2018 MPE for 2018Q2 global GDP.

Global PMI composite output and global output

(diffusion index, lhs; q-o-q % changes, rhs)

6

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

38

40

42

44

46

48

50

52

54

56

58

2007 2009 2011 2013 2015 2017

Global GDP (q-o-q percentage change, rhs)Global Composite PMIGlobal Composite PMI - longterm average

34

38

42

46

50

54

58

62

2007 2009 2011 2013 2015 2017

Emerging market economiesEuro areaAdvanced economies excl. euro area

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Sources: Bloomberg (oil spot price), IMF (non-oil), ECB calculations. Latest observations: 11 September 2018 (oil), 7 September 2018 (non-oil).

Source: ECB.Latest observation: 11 September 2018.

Non-oil (index, 2015=100) NEER-38 (index 1999Q1=100)

7

Oil (USD/barrel) USD/EUR (level)

Commodity prices and exchange rates

20406080

100120140160

2007 2009 2011 2013 2015 2017

MPE: 72.05

July GovC: 73.15

79.12

1.01.11.21.31.41.51.61.7

2007 2009 2011 2013 2015 2017

MPE: 1.15

July GovC: 1.17

1.16

100

105

110

115

120

125

2007 2009 2011 2013 2015 2017

MPE: 119.01

July GovC: 118.77

120.24

40

80

120

160

200

240

2007 2009 2011 2013 2015 2017

Food Metals (incl. iron-ore)

MPE: 90.6July GovC: 91.3

MPE: 120.63July GovC: 121.17

88.50

119.23

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Sources: Eurostat and ECB calculationsLatest observations: August 2018 (flash estimate)

Price level(1999m1=100, trend= year-on-year inflation at 2%)

Sources: Eurostat.Latest observations: August 2018 (flash estimates).

HICP and HICP excluding energy and food(annual percentage changes)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

HICP HICP excluding energy and food

2.0

1.0

90

100

110

120

130

140

150

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

HICP Trend line (2%)

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ECB package of measures timeline

9Source: ECB.

The 2014-2018 ECB package of measures

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• our policy rates, • our asset purchase programme, • and our forward guidance on each of these tools

Monetary policy stance determined by combination & interaction of:

• the TLTROs, which will remain outstanding until March 2021

… complemented by:

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Sources: ECBLatest observations: July 2018

Growth rate of M3(annual percentage changes)

-2

0

2

4

6

8

10

12

14

2007 2009 2011 2013 2015 2017

M3

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Labour market

Sources: Eurostat, Markit. ECB calculations.Note: Positive values for PMI indicate expansion.Latest observations: 2018Q2 for employment growth; 2018Q3 for PMI.

Employment(PMI: deviation from 50; Employment growth q-o-q: percentages)

Unemployment rate(in percent of labour force)

Source: Eurostat.Latest observation: July 2018.

12

0

5

10

15

20

25

30

2001 2003 2005 2007 2009 2011 2013 2015 2017

DE ES FR IT EA

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

-10

-8

-6

-4

-2

0

2

4

6

8

2001 2003 2005 2007 2009 2011 2013 2015 2017

PMI employment Employment growth (rhs)

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Business investment

Sources: September 2018 MPE, ECB calculations.Note: Series are adjusted for the estimated impact of the Netherlands in 2015 and Ireland in2016. Latest observation: 2018Q2.

Real investment(2008Q1=100)

Sources: DG-ECFIN, ECB calculations.Note: Long-term average refers to the period since 1985. Latest observation: 2018Q3.

Capacity utilisation(capital goods sector, percentage)

13

70

75

80

85

90

95

100

105

110

2003 2005 2007 2009 2011 2013 2015 2017

Total Business

70

75

80

85

90

1985 1989 1993 1997 2001 2005 2009 2013 2017

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Private consumption

Disposable income and consumption(annual percentage changes)

Sources: Eurostat, ECB calculations.Notes: All income components are deflated with the GDP deflator. The contribution from the terms of trade is proxied by the differential in the GDP and consumption deflator. Consumption and total disposable income are deflated with the consumption deflator. Latest observations: 2018Q1 for income, 2018Q2 for consumption.

14

-5-4-3-2-1012345

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Terms of tradeDirect taxes, social contributions and transfersOperating surplus and property incomeCompensation of employeesReal disposable incomeReal consumption

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The ECB’s forward guidance before the 14 June 2018 Governing Council

15

• expected to remain at present levels for an extended period of time• and well past horizon of net asset purchases

Key ECB interest rates

• net asset purchases intended to continue at monthly pace of €30 billion, until end-Sep 2018

• or beyond, if necessary & in any case until GovC sees sustained adjustment in path of inflation (SAPI) consistent with inflation aim

• Eurosystem will reinvest principal payments from maturing securities for an extended period of time after end of net purchases, and in any case for as long as necessary

Asset Purchase Programme (APP)

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Convergence

• Headline inflation on course to reach levels below, butclose to, 2% in the medium term

Confidence

• Sufficient confidence in durable stabilisation of inflationaround these levels

Resilience

• Resilience of inflation convergence even after the endof net asset purchases.

Criteria for sustained adjustment in the path of inflation (SAPI)

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Sources: Eurostat, ECB calculations. Note: The permanent and common component of inflation (PCCI, formerly know as U2core) corresponds to a dynamic factor model based on the full 93 HICP items from each of 12 countries. Supercore (slightly revised methodology) is based only on those items in HICP excluding energy and food that are sensitive to slack as measured by the output gap. The range includes exclusion-based measures, trimmed means and a weighted median. Latest observations: August 2018 (flash estimate) for HICP excluding energy and food (HICPX) and July 2018 for the rest.

Measures of underlying inflation(annual percentage changes)

0.00.20.40.60.81.01.21.41.61.82.0

2013 2015 2017

HICP excluding energy and food (HICPX)

HICP excluding energy, food, travel-related items and clothing

PCCI

Supercore

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18

Euro area wage Phillips curve decomposition(deviations from mean in y-o-y growth terms;

percentage point contributions)

Sources: Eurostat, ECB staff calculations based on June 2018 BMPE.Notes: Contributions are calculated based on an equation in which the annualisedquarterly growth of compensation per employee is regressed against its own lag,the lagged unemployment rate, productivity growth, the four-quarter movingaverage of headline inflation and a constant. Estimation sample: 1999Q1 until2018Q1. Contributions are derived as in Yellen, J.L. (2015), “Inflation Dynamicsand Monetary Policy”, Speech at the Philip Gamble Memorial Lecture, Universityof Massachusetts, Amherst, September 24.

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

ResidualProductivityPast inflationLabour market slack (unemployment rate)Compensation per employee

Option implied probability density function of euro area inflation over the next five years

Sources: Bloomberg, Reuters, and ECB calculations.Notes: Density functions are computed from 5-year maturity zero-coupon inflationoption floors under the assumption of risk neutrality. Shaded areas indicate aprobability mass of 15% assigned to the inflation rate over the next 5 years.

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The ECB’s current forward guidance (13 September 2018)

Key ECB interest rates

• expected 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 mediumterm

Asset purchase programme (APP)

• Reduce the monthly pace of net asset purchases to €15 billion (from previously €30billion) from October until end-December 2018

• Anticipate that, subject to incoming data confirming the medium-term inflation outlook,net purchases will end after December 2018

• Reinvest principal payments from maturing securities for an extended period of timeafter the end of net purchases, and in any case for as long as necessary to maintainfavourable liquidity conditions and an ample degree of monetary accommodation

Economic developments in the euro area developments in the euro area Société Royale d’Economie...

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