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Economic Bulletin Summary - Issue 6 / 2017

Core Content

The Economic Bulletin Issue 6 / 2017 provides a comprehensive overview of the economic and monetary developments in the euro area and globally as of September 2017. It outlines the ECB's assessment of the economic expansion, inflation dynamics, monetary policy stance, and financial conditions.

Main Points

Economic and Monetary Developments Overview

• The euro area economic expansion is solid and broad-based, with real GDP growth of 0.6% in Q2 2017, up from 0.5% in Q1 2017.
• The ECB's monetary policy measures are supporting domestic demand, which remains the primary driver of growth.
• Despite the ongoing expansion, inflation has not yet translated sufficiently into stronger dynamics, remaining at subdued levels.
• The Governing Council decided to maintain key interest rates unchanged and expects them to remain at current levels for an extended period.
• The Net Asset Purchase Programme (APP) is set to continue at €60 billion per month until the end of 2017 or beyond if necessary.
• The ECB will reassess policy instruments in the autumn based on the inflation path and financial conditions.

Inflation Projections

• The HICP inflation in August 2017 was 1.5%, up from 1.3% in July, driven by energy and processed food prices.
• Underlying inflation (excluding energy and food) was 1.2%, unchanged from July, but 0.4 percentage points higher than the average for the final quarter of 2016.
• The ECB's staff projections for HICP inflation are 1.5% in 2017, 1.2% in 2018, and 1.5% in 2019.
• The euro exchange rate has appreciated by 3.4% in trade-weighted terms since June 2017, which is expected to temporarily reduce headline inflation in the coming months.

Fiscal Developments

• The euro area budget deficit is projected to decline from 1.5% of GDP in 2016 to 0.9% in 2019, due to improving cyclical conditions and lower interest payments.
• Structural deficits remain unchanged, despite favorable growth dynamics.

Financial Developments

• Sovereign bond yields in the euro area have remained broadly unchanged since June, with the ten-year OIS rate rising to 0.58% and the GDP-weighted sovereign bond yield increasing to 0.99%.
• Corporate bond spreads have declined, with NFC bond spreads being 5 basis points lower than in early June and 70 basis points below March 2016 levels.
• The euro has appreciated significantly, up 3.7% in trade-weighted terms since June, with bilateral appreciation against the USD, JPY, GBP, and CHF.
• The appreciation of the euro is attributed to improved growth prospects, tighter monetary policy in the US, and improved market sentiment.

Key Information

Global Economic Outlook

• Global economic activity is projected to moderately accelerate in 2017-2019, with world real GDP growth (excluding the euro area) expected to rise from 3.2% in 2016 to 3.7% in 2017 and 3.8% in 2018-2019.
• The euro area's foreign demand growth is expected to rise from 1.6% in 2016 to 4.7% in 2017, then 3.4% in 2018 and 3.5% in 2019.
• Global inflation is expected to rise slowly, with energy prices providing a small positive contribution, and spare capacity diminishing to support underlying inflation.

Risks and Uncertainties

• The balance of risks for the euro area growth outlook is broadly balanced, but downside risks are present, including:
  • Increased trade protectionism
  • A disorderly tightening of global financial conditions
  • Possible disruptions from China's reforms
  • Political and geopolitical uncertainties, particularly regarding UK-EU relations
  • Uncertainty about the future of US fiscal policy

Regional Developments

• United States: Expected to see stronger growth due to the depreciation of the USD and improved global growth. However, fiscal stimulus is expected to be smaller than previously anticipated, and hurricane Harvey may affect economic activity in the near term.
• United Kingdom: Growth is expected to remain muted due to rising inflation and falling real wages.
• Japan: Accommodative monetary and fiscal policies are expected to support domestic demand, with exports gradually recovering.
• China: Economic activity continues to expand at a robust pace, supported by resilient consumption and a buoyant housing market.
• Central and Eastern Europe: Benefits from strong consumption and investment, with EU structural funds supporting the latter.
• Brazil and Russia: Both are recovering from deep recessions, with Russia's activity likely to continue rising due to oil prices and a benign external environment.

Boxes Highlights

Box 1: Investment Dynamics in Advanced Economies

• Investment in advanced economies has been subdued since the financial crisis.
• The decline in investment is attributed to weak corporate profitability, tightening financial conditions, and lack of structural reforms.

Box 2: Liquidity Conditions and Monetary Policy Operations

• Excess liquidity in the euro area increased by €100 billion to €1,770 billion due to ongoing APP purchases.
• Liquidity conditions remain supportive, but market volatility has been observed due to geopolitical tensions and economic news.

Box 3: Recent Developments in Euro Area Labour Supply

• Employment growth has continued, surpassing the pre-crisis peak in 2008.
• Unemployment has declined significantly from 12.1% in 2013 to 9.1% in July 2017, the lowest since February 2008.

Box 4: Reducing Unemployment from a Historical Perspective

• Historical reductions in unemployment have been linked to structural reforms and monetary policy support.
• The euro area has made progress, but long-term unemployment remains a challenge.

Box 5: Structural Reform Needs in the Euro Area

• A survey of large companies indicates that structural reforms are still needed to improve productivity and competitiveness.
• Labour market reforms have had a positive impact on employment, but wage growth remains modest.

Box 6: Base Effects in HICP Inflation

• Base effects are expected to temporarily lower headline inflation at the start of the year.
• Underlying inflation is expected to rise gradually as economic slack is absorbed and wages increase.

Box 7: Base Money, Broad Money and the APP

• Base money and broad money have remained robust, despite monthly volatility.
• The APP continues to support borrowing conditions, with sovereign bond yields remaining stable.

Article Summary

Article 1: Modelling Euro Banknote Quality

• The article discusses the modelling of euro banknote quality and its impact on monetary policy.
• Data-driven analysis is used to assess the dynamics of cash cycles in the euro area.

Statistics

• Euro area real GDP growth: 0.6% in Q2 2017, 0.5% in Q1 2017.
• HICP inflation in August 2017: 1.5%, up from 1.3% in July.
• Global GDP growth (excluding euro area): Projected to increase from 3.2% in 2016 to 3.7% in 2017 and 3.8% in 2018-19.
• Euro area foreign demand growth: Projected to rise from 1.6% in 2016 to 4.7% in 2017, then 3.4% in 2018 and 3.5% in 2019.
• Euro appreciation: 3.7% in trade-weighted terms since June 2017.
• Euro area sovereign bond yields: Increased slightly, with the ten-year OIS rate at 0.58% and GDP-weighted sovereign bond yield at 0.99%.
• Corporate bond spreads: Declined, with NFC bond spreads at 5 basis points lower than in early June.
• Euro area equity prices: Fell by around 3% for NFCs and 2.5% for financial corporations, mainly due to geopolitical risks, but remain above pre-referendum levels.