Global growth remains modest and uneven. While activity continues to expand at a solid pace in advanced economies, developments in emerging market economies remain weak overall and more diverse. After a very weak first half of the year in 2015, global trade is recovering, albeit at a slow pace. Global headline inflation has remained low and recent additional declines in oil and other commodity prices will further dampen inflationary pressures.
Increased uncertainty related to developments in China and renewed oil price declines have led to a sharp correction in global equity markets and renewed downward pressures on euro area sovereign bond yields. Corporate and sovereign bond yield spreads have widened slightly. The increase in global uncertainty has been accompanied by an appreciation of the effective exchange rate of the euro.
The economic recovery in the euro area is continuing, largely on the back of dynamic private consumption. More recently, however, the recovery has been partly held back by a slowdown in export growth. The latest indicators are consistent with a broadly unchanged pace of economic growth in the fourth quarter of 2015. Looking ahead, 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 earlier progress made with fiscal consolidation and structural reforms. Moreover, the renewed fall in the price of oil should provide additional support for households’ real disposable income and corporate profitability and, therefore, private consumption and investment. In addition, the fiscal stance in the euro area is becoming slightly expansionary, reflecting inter alia measures in support of refugees. However, the recovery in the euro area is dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms. The risks to the euro area growth outlook remain on the downside and relate in particular to the heightened uncertainties regarding developments in the global economy as well as to broader geopolitical risks.
Euro area annual HICP inflation was 0.2% in December 2015, compared with 0.1% in November. The December outcome was lower than expected, mainly reflecting the renewed sharp decline in oil prices, as well as lower food and services price inflation.
Most measures of underlying inflation continued to be broadly stable, following a pick-up in the first half of 2015. Non-energy import prices were still the main source of upward price momentum as domestic price pressures remained moderate. On the basis of current oil futures prices, which are well below the level observed a few weeks ago, the expected path of annual HICP inflation in 2016 is now significantly lower compared with the outlook in early December 2015. Inflation rates are currently expected to remain very low or to turn negative in the coming months and to pick up only later in 2016. Thereafter, supported by the ECB’s monetary policy measures and the economic recovery, inflation rates should continue to recover, although risks of second-round effects from the renewed fall in energy price inflation will be monitored closely.
Broad money growth remained robust in November, driven mainly by the low opportunity cost of holding the most liquid monetary assets and the impact of the ECB’s expanded asset purchase programme. In addition, lending to the euro area private sector continued on a path of gradual recovery, supported by easing credit standards and increasing loan demand. Nevertheless, the annual growth rate of loans to non-financial corporations remains low, as developments in loans to enterprises continue to reflect the lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets.
At its meeting on 21 January 2016, based on its regular economic and monetary analyses, and after the recalibration of the ECB’s monetary policy measures in December 2015, the Governing Council decided to keep the key ECB interest rates unchanged. These rates are expected to remain at present or lower levels for an extended period of time. With regard to 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. More generally, and taking stock of the evidence available at the beginning of 2016, it is clear that the monetary policy measures adopted by the Governing Council since mid-2014 are working. As a result, developments in the real economy, credit provision and financing conditions have improved and have strengthened the euro area’s resilience to recent global economic shocks. The decisions taken in early December to extend the monthly net asset purchases of €60 billion to at least the end of March 2017, and to reinvest the principal payments on maturing securities for as long as necessary, will result in a significant addition of liquidity to the banking system and will strengthen the forward guidance on interest rates.
However, at the start of the new year, the Governing Council assessed that downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks. In this environment, euro area inflation dynamics also continue to be weaker than expected. Therefore, it will be necessary for the Governing Council to review and possibly reconsider the ECB’s monetary policy stance in early March, when the new staff macroeconomic projections – also covering the year 2018 – will become available. In the meantime, work will be carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation, if needed.