ECB Economic Bulletin, No. 7 - 2015

Global economic activity remained moderate in the third quarter of 2015, with substantial divergence across major economies. Growth momentum in the United States and the United Kingdom appeared to slow, following a strengthening in activity in the second quarter, while momentum in Japan remained relatively subdued. In China, data for the third quarter remain consistent with a gradual slowdown in the economy. In emerging market economies, the past fall in commodity prices has led to a divergence in growth between commodity-importing and commodity-exporting countries. Global trade remains weak, while global headline inflation has stabilised at low levels in recent months.

Euro area financial markets have continued to show some volatility. Government bond yields have declined significantly across all euro area countries, with the ten-year GDP-weighted euro area sovereign bond yield falling by around 30 basis points from the beginning of September to 1.16% on 21 October. Stock market prices in the euro area were around 2% higher at the end of this period, despite recording significant price movements and temporarily falling by around 6%. The effective exchange rate of the euro remained broadly stable. In spite of a less supportive external environment, the euro area economic recovery is proceeding, increasingly supported by domestic factors, in particular private consumption. Real GDP rose by 0.4% quarter on quarter in the second quarter of 2015, following a rise of 0.5% in the previous quarter. The most recent indicators point to a broadly similar pace of growth in the third quarter. Looking ahead, the economic recovery is expected to continue, albeit dampened by weaker than expected foreign demand. Domestic demand should be further 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, the decline in oil prices should bolster households’ real disposable income and corporate profitability, thus supporting private consumption and investment. However, the risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties regarding  developments in emerging market economies, which have the potential to further weigh on global growth and foreign demand for euro area exports. The increased uncertainty that has recently manifested itself in financial market developments may also have negative repercussions for euro area domestic demand. Reflecting declining energy prices, headline inflation dipped back into negative territory in September, standing at -0.1%, while HICP inflation excluding energy remained stable at 0.9%. On the basis of the available information and current oil futures prices, annual HICP inflation is expected to remain very low in the near term, but rise at the turn of the year, mainly on account of base effects linked to the fall in oil prices in late 2014. Inflation rates are foreseen to pick up further during 2016 and 2017, supported by the expected economic recovery, the pass-through of past declines in the euro exchange rate and the assumption embedded in oil futures markets of somewhat higher oil prices in the years ahead. However, there are risks stemming from the economic outlook and from financial and commodity market developments which could further slow down the gradual increase in inflation rates towards levels closer to 2%.

Despite some moderation, broad money growth remained robust in August and continued to be driven by its most liquid components. Domestic sources of money creation were again of increasing importance, partly as a result of the ECB’s nonstandard monetary policy measures. Ongoing shifts away from longer-term financial liabilities and increased credit flows were visible, with the latter reflecting the impact of the expanded asset purchase programme (APP). Meanwhile, loan dynamics remained on a path of gradual recovery, despite being hampered in some countries.

Bank lending rates for non-financial corporations declined further in August, with the ECB’s non-standard measures making a notable contribution to this improvement. Moreover, the October 2015 euro area bank lending survey  suggests that changes in credit standards and loan demand are continuing to support a recovery in loan growth.

At its meeting on 22 October 2015, based on its regular economic and monetary analyses and in line with its forward guidance, the Governing Council decided to keep the key ECB interest rates unchanged. As regards non-standard monetary policy measures, the asset purchases are proceeding smoothly and continue to have a favourable impact on the cost and availability of credit for firms and households.

The Governing Council stressed that the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis. The risks to inflation outlook are being closely monitored by the Governing Council. In this context, the degree of monetary policy accommodation will be re-examined at the December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available. The  Governing Council emphasised that it is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation. In particular, it recalled that the APP provides sufficient flexibility in terms of adjusting its size, composition and duration, and said that, in the meantime, the monthly asset purchases of €60 billion will continue to be fully implemented. These purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with the ECB’s aim of achieving inflation rates below, but close to, 2% over the medium term.

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