30 July 2015

ECB: Economic bulletin

Following some loss of momentum in early 2015, the global economy is expected to resume its modest recovery path, with notable differences across regions. In the United States and the United Kingdom there are signs of a rebound in activity, while in Japan available indicators suggest a softening in the growth outlook, after a strong first quarter. In China, recent data indicate a rebound in economic expansion in the second quarter, but the fall in equity prices has increased uncertainty. The momentum in global trade remains weak, mostly owing to declining trade in emerging market economies. Global headline inflation remains low, as it is held down by earlier energy price declines.

The latest developments in the euro area financial markets have been marked by increased volatility, primarily on account of heightened uncertainty regarding the negotiations between Greece and its official creditors. While euro area equity prices have generally risen since early June, some pronounced oscillations were recorded in recent weeks. At the same time, euro area long-term government bond yields remained, overall, broadly unchanged and stayed at levels higher than the recent historical lows of mid-April. Differentials with respect to German yields declined in Italy, Spain and Portugal and remained broadly stable overall across the remaining euro area countries, excluding Greece. The euro exchange rate weakened in effective terms.

Euro area quarterly real GDP growth in the first quarter of 2015 was confirmed at 0.4%. Growth was driven by domestic demand on the back of robust contributions from private consumption and now also from investment. The latest survey data, up to June, remain consistent with a continuation of the moderate growth trend in the second quarter. Looking ahead, the economic recovery is expected to broaden further. Domestic demand should be supported by the ECB’s monetary policy measures and their favourable impact on financial conditions, as well as by the progress made with fiscal consolidation and structural reforms. Moreover, low oil prices should continue to bolster households’ real disposable income and corporate profitability, thus supporting private consumption and investment. Furthermore, demand for euro area exports should benefit from improvements in price competitiveness.

Inflation bottomed out at the beginning of the year and has moved back into positive territory in recent months. Annual HICP inflation declined slightly in June, to 0.2% from 0.3% in May. On the basis of the available information and current oil futures prices, it is expected to remain low in the months ahead and rise towards the end of the year, partly on account of base effects linked to the fall in oil prices in late 2014. Supported by the expected economic recovery, the impact of the lower euro exchange rate and the assumption embedded in oil futures markets of somewhat higher oil prices in the years ahead, inflation rates are expected to pick up further during 2016 and 2017.

Narrow and broad money dynamics continue to be robust. In a low interest rate environment, portfolio substitution is driving broad money growth, and overnight deposits continue to make a sizeable contribution to M3 growth. Loan dynamics have improved further but remain weak, in particular for loans to non-financial corporations. Bank lending rates have declined further, and the most recent euro area bank lending survey points to further improvements in lending conditions and credit demand. Also, fragmentation in terms of credit demand in individual countries decreased and the targeted longer-term refinancing operations helped to improve the terms and conditions for credit supply. Overall, the monetary policy measures put in place by the ECB since June 2014 are providing visible support for improvements both in borrowing conditions for firms and households and in credit flows across the euro area.

Based on its regular economic and monetary analyses and in line with the Governing Council’s forward guidance, at its meeting on 16 July 2015, the Governing Council decided to keep the key ECB interest rates unchanged. Regarding non-standard monetary policy measures, the asset purchase programmes continue to proceed smoothly. The Governing Council also reaffirmed its previous assessment that there is a need to maintain a steady monetary policy course, where the full implementation of all monetary policy measures will provide the necessary support to the euro area economy and lead to a sustained return of inflation rates towards levels below, but close to, 2% in the medium term.

Looking ahead, the Governing Council will continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability. If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate.

Economic bulletin

Article: 'Real convergence in the euro area'

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