Evento: Global Independence Center - Central Banking Serie

Arce Hortigüela, Óscar Javier

English

Arce, Óscar

Repositorio Institucional de la Biblioteca del Banco de España

THE EURO AREA: ECONOMIC SITUATION, PROSPECTS AND CHALLENGESÓscar ArceDirector General Economics, Statistics and Research Banco de EspañaGlobal Interdependence Center – Central Banking SeriesMadrid, 2018 November 15th2The euro area: economic situation, prospects and challengesOUTLINE1. The slowdown of economic growth in the euro area2. Growth and inflation prospects3. Rising risks4. Main challengesThe slowdown of economic growth in 2018• Following strong momentum in 2017, growth in the EA is slowing: Average qoqgrowth stood near 0,7% in 2017; 0,3% in the first three quarters in 2018 (0,15% inQ3).• The slowdown has been larger than anticipated, and affects all large euro areacountries3Sources: Eurostat, European Commission, ECB and IHS Markit.(a) Nearest ECB forecast. Last March, June and September ejercises for Q1, Q2 and Q3, respectively-0,5-0,3-0,10,10,30,50,70,91,11,31,5-0,250,000,250,500,751,002014 2015 2016 2017 2018GDP FORECAST  PMI (Right-hand scale)GDP QUARTERLY GROWTH %0,00,10,20,30,40,50,60,70,8EMU DE FR IT ES 2017  2018 Q1-Q3AVERAGE GDP QUARTER-ON-QUARTER GROWTH%External Factors stand behind the larger than expected moderation• Modest growth during 2018 largely reflects global trade moderation: Net tradecontribution to growth has been negligible• Transitory factors could have also played a role in some countries (weather, strikes,diesel…)40,00,20,40,60,81,01,2OBSERVED BMPE DEC-17DOMESTIC DEMAND  NET EXPORTS  GDPREAL GDP GROWTH AND CONTRIBUTIONSFIRST HALF OF 2018%, PP48495051525354552013 2014 2015 2016 2017 2018 MANUFACTURING  NEW EXPORT ORDERSGLOBAL PMISources: ECB, Eurostat and IHS Markit. Last date: 2018, October for PMIDomestic fundamentals (I): Labour market developments• Domestic fundamentals remained resilient, underpinning economic growth• Job creation has been key in the expansion and is expected to remain robust• Labour market improvements are starting to be transmitted to wage growth. The risein wages is broad-based by sectors and countries.589910101111121213-0,3-0,2-0,10,00,10,20,30,40,50,62013 2014 2015 2016 2017 2018 EMPLOYMENT (quarter-on-quarter growth) UNEMPLOYMENT RATE (Right-hand scale) PMI ASSESSMENT OF EMPLOYMENT (Right-hand scale)EMPLOYMENT, UNEMPLOYMENT AND PMI INDEXSource: Eurostat and IHS Markit. Last date: 2018 Q2 to employment and compensation per employee, 2018 September to unemployment and 2018 October to PMI-1,2-1,0-0,8-0,6-0,4-0,20,00,20,40,62011 2012 2013 2014 2015 2016 2017 2018RESIDUALINFLATIONUNEMPLOYMENT  GAPPRODUCTIVITY COMPENSATION PER EMPLOYEECOMPENSATION PER EMPLOYEE GROWTH DESCOMPOSITION Breakdown based on Phillips Curve estimation(Deviations from the mean)%Domestic fundamentals (II): Household income• Strong job creation and (recent) increases in wages are supporting householdincome, though rising inflation is dampening household purchasing power• Household consumption growth has closely followed income developments, withsaving rates near historic lows (except in Germany)6-3-2-10123409 10 11 12 13 14 15 16 17 18 CONSUMPTION (real terms) NOMINAL GDI REAL GDIHOUSEHOLD GROSS DISPOSABLE INCOME (GDI) AND CONSUMPTIONAnnual growth ratesSources: ECB and  Eurostat. Last date: 2018, second quarter.-5-4-3-2-10123452009 2010 2011 2012 2013 2015 2016 2017 2018GERMANY FRANCE EURO AREAITALY SPAINSAVING RATEDeviations from long-term average (1999-2018 Q2)% GDIDomestic fundamentals (III): Favourable financing conditions• Very loose financial conditions continue to support lending to the private sector, withloan rates at historical lows723456781,01,52,02,53,03,54,02013 2014 2015 2016 2017 2018NON-FINANCIAL CORPORATIONS <€1MILLIONNON-FINANCIAL CORPORATIONS >€1MILLION HOUSE PURCHASE CONSUMPTION (rhs)%BANK LOANS INTEREST RATES%-4-3-2-10123452013 2014 2015 2016 2017 2018 NON-FINANCIAL CORPORATIONS HOUSEHOLDS%BANK LOANSAnnual growth ratesSources: ECB. Last date: 2018, September.The role of monetary and fiscal policies• Fiscal policy is expected to have a slight expansionary stance both in 2018 and 2019• Monetary policy will still provide substantial monetary stimulus in order to support abuild-up of domestic price pressures over the medium term8-4-3-2-1012-4-3-2-10122012 2013 2014 2015 2016 2017 2018 2019 2020 BALANCE CHANGE IN THE STRUCTURAL BALANCE (Right-hand scale)FISCAL POLICY STANCE% GDP pps of POTENTIAL GDPSource: European Commission (Autumn 2018 forecast) and Bloomberg.-0,4-0,20,00,20,40,60,8Q4Q1Q2Q3Q4Q1Q2Q3Q42018 2019 2020 MEDIAN HIGH FORECAST LOW FORECASTExpected deposit rate(Nov. Survey)%01020304050601 Y 2 Y 3 Y + 3 yReinvestments(Oct. Survey)Length full reinvestment periodMONETARY POLICY EXPECTATIONSBloomberg survey% of respondentsGDP prospects• Domestic fundamentals will remain underpinning economic growth, above potential,although the slowdown in external trade and rising uncertainty will weigh in growth9GDP GROWTH FORECAST 2017 2018 2019 2020ECBSeptember 18 2.5 2.0 1.8 1.7June 18 2.5 2.1 1.9 1.7European CommissionNovember 18 2.4 2.1 1.9 1.7July 18 2.4 2.1 2.0 …MFIOctober 18 2.4 2.0 1.9 1.7July 18 2.4 2.2 1.9 …OECD September 18 2.5 2.0 1.9 …May 18 2.5 2.2 2.1 …Survey Professional ForecastersOctober 18 … 2.0 1.8 1.6July 18 … 2.2 1.9 1.6ConsensusOctober 18 2.5 2.0 1.8 1.4September 18 2.5 2.1 1.8 …EurobarometerOctober 18 2.5 2.0 1.8 1.6September 18 2.5 2.1 1.8 …-0,50,00,51,01,5-1012312 13 14 15 16 17 18 19 20 QUARTER ON QUARTER GROWTH (RHS) ANNUAL GDP GROWTH POTENTIAL GDP GROWTH% %REAL GDP GROWTHSource: Eurostat and European Commission. Inflation prospects• Growth rates above potential and tightening labour markets support confidence onthe sustained convergence of inflation towards the medium-term reference.• Although core inflation is still hovering around 1%.10INFLATION FORECAST 2017 2018 2019 2020ECBSeptember 18 1.5 1.7 1.7 1.7June 18 1.5 1.7 1.7 1.7European CommissionNovember 18 1.5 1.8 1.8 1.6July 18 1.5 1.7 1.7 …MFIOctober 18 1.5 1.7 1.7 1.8April 1.5 1.5 1.6 1.8OECD September 18 … … … …May 18 1.5 1.6 1.8 …Survey Professional ForecastersOctober 18 … 1.7 1.7 1.7July 18 … 1.7 1.7 1.7ConsensusOctober 18 1.5 1.7 1.7 1.7September 18 1.5 1.7 1.6 …EurobarometerOctober 18 1.5 1.7 1.6 …September 18 1.5 1.7 1.7 1.7-0,50,00,51,01,52,02,52013 2014 2015 2016 2017 2018 2019 2020 GENERAL  EXCLUDING ENERGY AND FOOD%EURO AREA INFLATIONSource: Eurostat and ECB. Last date: 2018 OctoberRising risks to the economic scenario• Downside risks have related to both global and domestic factors have intensified:11 Protectionism tensions Most estimates of the impact of enacted tariff increasessuggest limited effects for the euro area, but larger effects through confidence effectsand postponement of investments cannot be discarded Global policy uncertainties and turmoil in emerging markets: Fiscal expansion inthe US and the gradual normalization of Fed’s monetary policy tightenf global financialconditions, with a stronger impact om highly indebted EMEs. Uncertainty about the degree of slack of the euro area economy: high levels ofcapacity utilization and some labour shortages point to possible supply siderestrictions in some sectors/countries. Tensions in Italy: So far, contagion effects have been limited, but it cannot be ruledout that further bouts of uncertainty over the Italian fiscal situation might have moresignificant adverse effects in the future Risk of no deal for Brexit: it would entail important changes in trade relations afterApril 2019 with potentially large impact on some financial marketsegments/insturmentsProtectionism tensions• Trade tensions have further increased in recent months. Most estimates of theimpact of enacted tariff increases suggest limited effects for the euro area.• But large indirect effects -through confidence and uncertainty leading companies topostpone or cancel investment projects- cannot be discarded12EU TRADE POLICY• The EU imposed tariffs to $3.3 billion worth of USgoods in response to iron and steel tariffsUS-EU TRADE AGREEMENTo Work towards a free trade area, with zero tariffs onnon-auto industrial goods, zero non-tariff barriers andzero subsidies on non-auto industrial goods. EU willincrease imports of gas and soya beans from the US.o Work together to reform the WTO and to protectintellectual property rightso The deal lacks of details and specifics.JAPAN- EU ECONOMIC PARTNERSHIP AGREEMENTo Removal of the majority of tariffs and opening ofagricultural and services markets.o For the first time, the agreement includes a specificcommitment to the Paris climate change.Source: IMF, October 2018.(a) Effects of tariffs enacted plus other potential retaliation measures, confidence effects and market reactions-1,0-0,9-0,8-0,7-0,6-0,5-0,4-0,3-0,2-0,10,0USA CHINA EUROAREAJAPAN WORLD TARIFFS ENACTED POTENTIAL TOTAL EFECTS (a)REAL GDP IN TRADE TENSIONS SCENARIO(Long term percent deviation from control)Global policy uncertainty and financial conditions• Fiscal expansion in the US together with tighter monetary policy is leading to atightening of global financial conditions. Highly indebted EMEs have been the mostvulnerable, with strong depreciations of their currencies• The euro has significantly appreciated in nominal effective terms since 201713Sources: ECB and IMF GSFR October 2018. Last date: November, 13.-0,50,00,51,01,52,02,53,03,5Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 USA  GERMANY10 YEAR INTEREST RATES%1,031,051,071,091,111,131,151,171,191,211,231,25103105107109111113115117119121123125Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Euro Effective Echange Rate EER-38 DOLLAR (Right-hand scale)EXCHANGE RATE100 = 1999 Q1 $/€-1,0-0,50,00,51,01,52,0S-12 S-13 S-14 S-15 S-16 S-17 S-18 USA Other Systemically Important Advanced Economies CHINA Other Systemically Important Emerging EconomiesGLOBAL FINANCIAL CONDITIONS INDICES%TIGHTERCONDITIONSUncertainties related to the extent of supply side constrains • There is uncertainty regarding the degree of slack of the economy: high levels ofcapacity utilization and some labour shortages point to possible supply siderestrictions• But, there are some signals of remaining slack in the labour market, as broaderdefinitions of unemployment reflect.14010203040506060657075808590CULeft-handscaleEmploy_mentDemand Equip-mentFinancing None RANGE  Q3 2018  AVERAGE (a)EURO AREA.CAPACITY UTILISATION AND FACTORS LIMITING ACTIVITY 05101520252008 2014 2017-2018UNDEREMPLOYEDLOOKING FOR WORK, BUT NOT AVAILABLEAVAILABLE, BUT NOT LOOKING FOR WORKUNEMPLOYEDEURO AREA.BROADER ESTIMATIONS OF UNDERUTILIZATION OF LABOR% BROADENED ACTIVE POPULATIONSources: European Commission and Eurostat. Last date: 2018, October for opinion indicators and September 2018 for unemployment.(a) Average since 1999 for capacity utilization and since 2004 for factors limiting activity.Italy• High public debt and low-growth are a notable source of vulnerability.• Rising sovereign yields and the reactivation of sovereign-bank risk nexus couldeventually offset the positive effects arising from fiscal expansion• So far, contagion effects towards other euro area countries have been limited, butfurther bouts of uncertainty cannot be ruled out15-1,00,01,02,03,04,05,06,07,08,007 08 09 10 11 12 13 14 15 16 17 18 GERMANY  FRANCE  ITALY  SPAIN10 YEAR SOVEREIGN YIELDS%050100150200250Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 SOVEREIGN  BANK SECTORITALY. SOVEREIGN-BANK NEXUSCDS 5-YEARS pbSources: ECB and IFS Datastream. Last date: November, 13.The impact of Brexit under a WTO scenario16Scenario WTOVariable GDP Inflation EmploymentCountry 5 yr HorizonUK -4.4 -2.2 -2.6Euro Area -0.3 -0.1 -0.1US 0.3 -0.1 0.1Japan 0.1 -0.1 0.0China 0.1 -0.1 0.0GDP World Trade (Exports)World -0.1 -2.8GDP: Accumulated % difference from baseline scenario.Inflation: Accumulated level difference from baseline scenario.Employment: Accumulated % difference from baseline scenario.Scenario WTOVariable GDP Inflation EmploymentCountry 5 yr HorizonUK -0.9 0.3 -1.2Euro Area 0.0 0.0 0.2US 0.0 0.0 0.0Japan 0.0 0.0 0.0China 0.0 0.0 0.0GDP World Trade (Exports)World 0.0 0.0GDP: Accumulated % difference from baseline scenario.Inflation: Accumulated level difference from baseline scenario.Employment: Accumulated % difference from baseline scenario.Trade channel Migration channelSource: Own simulations carried out with NiGEMThe euro area economy challenges17 Monetary policy normalisation will need to be proceed with caution to ensure acontinued sustained convergence of inflation towards the medium term reference, On fiscal policy, the economic expansion and low interest rates call for rebuilding fiscalbuffers, particularly in countries with high public debt. Meeting low productivity and demographic challenges will require further efforts onstructural reforms to boost potential long-term growth, improve shock-absorbing capacityand reduce vulnerabilities. Culmination of Brexit negotiations: the terms of the separation and the nature of the futureUK-UE relationship are yet to be defined In the medium term, the stability of the Eurozone will require deeper integration:- The institutional reform agenda must progress faster through parallel risk-reductionand risk-sharing measures while enhancing national responsibility.- The key priorities are completing the banking union, advancing on the capital marketunion agenda and designing supranational instruments to help to cope withasymmetric shocks and to support monetary policy in the event of big negative shocks.

The Euro Area: economic situation, prospects and challenges

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The Euro Area: economic situation, prospects and challenges

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