Monthly Bulletin March 2008 - European Central Bank These factors are also...

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    In 2008 all ECB publications

    feature a motif taken from the €10 banknote.

  • © European Central Bank 2008

    Address Kaiserstrasse 29 60311 Frankfurt am Main Germany

    Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany

    Telephone +49 69 1344 0


    Fax +49 69 1344 6000

    This Bulletin was produced under the responsibility of the Executive Board of the ECB. Translations are prepared and published by the national central banks.

    All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

    The cut-off date for the statistics included in this issue was 5 March 2008.

    ISSN 1561-0136 (print) ISSN 1725-2822 (online)

  • 3 ECB

    Monthly Bulletin March 2008



    The external environment of the euro area 9 Monetary and fi nancial developments 19 Prices and costs 58 Output, demand and the labour market 66 Fiscal developments 80 Exchange rate and balance of payments developments 85

    Boxes: Aggregating world GDP – the role of 1 exchange rates 10 EU cohesion policy in central and 2 eastern European countries 14 The importance of accounting 3 standards for interpreting MFI loan statistics 23 Liquidity conditions and monetary 4 policy operations in the period from 14 November 2007 to 12 February 2008 32 Stock market volatility in the light 5 of the fi nancial market turmoil 42 The determinants of non-fi nancial 6 corporations’ cash holdings: a microeconomic analysis 50 Recent developments in selected 7 measures of underlying infl ation for the euro area 60 European Commission investment 8 survey for the manufacturing sector 67 Employment developments in the 9 euro area construction sector 74 ECB staff macroeconomic 10 projections for the euro area 77



    Chronology of monetary policy measures of the Eurosystem I The TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) system V Documents published by the European Central Bank since 2007 IX Glossary XV


  • 4 ECB Monthly Bulletin March 2008

    ABBREVIATIONS COUNTRIES LU Luxembourg BE Belgium HU Hungary BG Bulgaria MT Malta CZ Czech Republic NL Netherlands DK Denmark AT Austria DE Germany PL Poland EE Estonia PT Portugal IE Ireland RO Romania GR Greece SI Slovenia ES Spain SK Slovakia FR France FI Finland IT Italy SE Sweden CY Cyprus UK United Kingdom LV Latvia JP Japan LT Lithuania US United States

    OTHERS BIS Bank for International Settlements b.o.p. balance of payments BPM5 IMF Balance of Payments Manual (5th edition) CD certifi cate of deposit c.i.f. cost, insurance and freight at the importer’s border CPI Consumer Price Index ECB European Central Bank EER effective exchange rate EMI European Monetary Institute EMU Economic and Monetary Union ESA 95 European System of Accounts 1995 ESCB European System of Central Banks EU European Union EUR euro f.o.b. free on board at the exporter’s border GDP gross domestic product HICP Harmonised Index of Consumer Prices HWWI Hamburg Institute of International Economics ILO International Labour Organization IMF International Monetary Fund MFI monetary fi nancial institution NACE Rev. 1 Statistical classifi cation of economic activities in the European Community NCB national central bank OECD Organisation for Economic Co-operation and Development PPI Producer Price Index SITC Rev. 3 Standard International Trade Classifi cation (revision 3) ULCM unit labour costs in manufacturing ULCT unit labour costs in the total economy

    In accordance with Community practice, the EU countries are listed in this Bulletin using the alphabetical order of the country names in the national languages.

  • 5 ECB

    Monthly Bulletin March 2008

    On the basis of its regular economic and monetary analyses, the Governing Council of the ECB decided at its meeting on 6 March 2008 to leave the key ECB interest rates unchanged. The information that has become available since the previous meeting of the Governing Council on 7 February has confi rmed the existence of strong short-term upward pressure on infl ation. It has also confi rmed the assessment that there are upside risks to price stability over the medium term, in a context of very vigorous money and credit growth. The economic fundamentals of the euro area are sound. Incoming macroeconomic data point to moderating but ongoing real GDP growth. Yet the level of uncertainty resulting from the turmoil in fi nancial markets remains high. Against this background, the Governing Council emphasises that maintaining price stability in the medium term is its primary objective in accordance with its mandate. Indeed, the fi rm anchoring of medium to longer-term infl ation expectations is of the highest priority. The Governing Council believes that the current monetary policy stance will contribute to achieving this objective, and remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. The Governing Council will continue to monitor very closely all developments over the coming weeks.

    Considering fi rst the economic analysis, the latest information on economic activity confi rms the picture of moderating growth around the turn of the year. According to Eurostat’s fi rst estimate, the quarter-on-quarter growth rate of euro area real GDP in the fourth quarter of 2007 was 0.4%, following 0.8% in the previous quarter. Surveys of business and consumer confi dence, which have followed a downward trend since the summer of 2007, overall remain consistent with ongoing growth.

    Looking ahead, in 2008 both domestic and foreign demand are expected to support ongoing real GDP growth in the euro area, albeit at lower rates than during 2007. The fundamentals of the euro area economy remain sound and the euro area economy does not suffer from major

    imbalances. While being dampened by the global slowdown, investment growth should provide ongoing support, as capacity utilisation is high and profi tability has been sustained. At the same time, as a result of the improved economic conditions and wage moderation, employment and labour force participation have increased signifi cantly and unemployment rates have fallen to levels not seen for 25 years. Despite the dampening effect of higher commodity prices, consumption growth should continue to contribute to economic expansion, in line with rising employment.

    These factors are also refl ected in the March 2008 ECB staff macroeconomic projections. Annual real GDP growth is projected to lie in the range of 1.3% to 2.1% in 2008, and to be between 1.3% and 2.3% in 2009. In comparison with the December 2007 Eurosystem staff macroeconomic projections, the ranges projected for real GDP growth in 2008 and 2009 have been revised downwards, refl ecting weaker global demand, stronger pressure from commodity prices and less favourable fi nancing conditions than were foreseen in December. Available forecasts from international organisations broadly confi rm this outlook.

    In the view of the Governing Council, uncertainty about the prospects for economic growth remains unusually high. Downside risks to the outlook for economic activity continue to exist. They relate mainly to a potentially broader than currently expected impact of fi nancial market developments. Further downside risks stem from the scope for additional commodity price rises, protectionist pressures and the possibility of disorderly developments owing to global imbalances.

    With regard to price developments, according to Eurostat’s fl ash estimate, the annual HICP infl ation rate was 3.2% in February 2008, unchanged from January. This confi rms the strong upward pressure on infl ation in the short term, stemming mainly from the increases in energy and food prices in recent months. Looking ahead, the Governing Council expects a more protracted


  • 6 ECB Monthly Bulletin March 2008

    period of relatively high rates of infl ation than it did a few months ago. The annual HICP infl ation rate will most likely remain signifi cantly above 2% in the coming months and moderate only gradually later in the year.

    The March 2008 ECB staff macroeconomic projections foresee annual HICP infl ation of between 2.6% and 3.2% in 2008, and between 1.5% and 2.7% in 2009. Compared with the December 2007 Eurosystem staff macroeconomic projections, the projected ranges for HICP infl ation have shifted upwards, mainly refl ecting signifi cant additional increases in food and energy prices.

    It is important to recall that these staff projections are based on a number of assumptions which are of a purely technical nature and unrelated to policy intentions. In particular, the technical assumptions for short-term interest rates are taken from market expectations as at mid-February.

    Moreover, it should be noted that the projections are based on the assumptions that the recent dynamism in commodity prices will diminish over the