Prices and costs According to Eurostats flash estimate, euro area annual HICP inflation declined to 1.4% in March 2019, from 1.5% in February(see Chart 7). This decline took place despite higher energy price inflation and reflected lower food price inflation and more especially, lower HICP inflation excluding energy and food Chart 7 Contributions of components of euro area headline HICP inflation annual percentage changes: percentage point contributions Services energy industrial goods a Food erg 1.5 1.0 2012 2013 2014 2015 2016 March 2019(flash estimates). Growth rates for 2015 are distorted upwards owing to a ethod for the package holiday price in nomic Bulletin, Issue 2, ECB, 2019) Measures of underlying inflation remained generally muted and continued their recent sideways movement. HICP inflation excluding energy and food declined to 0.8% in March, from 1.0% in February. The extent to which this decline was affected by developments in more volatile prices, for instance for travel and clothing or by the timing of the Easter holidays, can be assessed only with the release of the full HICP breakdown. Other measures of underlying inflation, including the Persistent and Common Component of Inflation(PCCI) indicator and the Supercore indicator which are only available for the period to February, also pointed to a continuation of the broad sideways movement of recent months. Nonetheless, all of the statistical and model-based measures remained above their respective lows in 2016. Looking ahead, measures of underlying inflation are expected to increase gradually, driven by stronger wage growth and the pick-up observed in domestic producer price inflation Supply chain price pressures for HICP non-energy industrial goods continued to increase. This build-up is visible in the later stages of the supply chain, with domestic producer price inflation for non-food consumer goods increasing further to 1.1%in February, its highest rate since March 2012 and twice its historical average Import price inflation for non-food consumer goods also continued to strengthen For more information on these measures of underlying inflation, see Boxes 2 and 3 in the article entitled Measures of underlying inflation for the euro area", Economic Bulletin, Issue 4, ECB, 2018. ECB Economic Bulletin, Issue 3/2019-Update on economic and monet Prices and
ECB Economic Bulletin, Issue 3 / 2019 – Update on economic and monetary developments Prices and costs 15 4 Prices and costs According to Eurostat’s flash estimate, euro area annual HICP inflation declined to 1.4% in March 2019, from 1.5% in February (see Chart 7). This decline took place despite higher energy price inflation and reflected lower food price inflation and, more especially, lower HICP inflation excluding energy and food. Chart 7 Contributions of components of euro area headline HICP inflation (annual percentage changes; percentage point contributions) Sources: Eurostat and ECB calculations. Notes: The latest observations are for March 2019 (flash estimates). Growth rates for 2015 are distorted upwards owing to a methodological change (see the box entitled “A new method for the package holiday price index in Germany and its impact on HICP inflation rates”, Economic Bulletin, Issue 2, ECB, 2019). Measures of underlying inflation remained generally muted and continued their recent sideways movement. HICP inflation excluding energy and food declined to 0.8% in March, from 1.0% in February. The extent to which this decline was affected by developments in more volatile prices, for instance for travel and clothing, or by the timing of the Easter holidays, can be assessed only with the release of the full HICP breakdown. Other measures of underlying inflation, including the Persistent and Common Component of Inflation (PCCI) indicator and the Supercore indicator1 , which are only available for the period to February, also pointed to a continuation of the broad sideways movement of recent months. Nonetheless, all of the statistical and model-based measures remained above their respective lows in 2016. Looking ahead, measures of underlying inflation are expected to increase gradually, driven by stronger wage growth and the pick-up observed in domestic producer price inflation. Supply chain price pressures for HICP non-energy industrial goods continued to increase. This build-up is visible in the later stages of the supply chain, with domestic producer price inflation for non-food consumer goods increasing further to 1.1% in February, its highest rate since March 2012 and twice its historical average. Import price inflation for non-food consumer goods also continued to strengthen 1 For more information on these measures of underlying inflation, see Boxes 2 and 3 in the article entitled “Measures of underlying inflation for the euro area”, Economic Bulletin, Issue 4, ECB, 2018. -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2012 2013 2014 2015 2016 2017 2018 2019 HICP Services Non-energy industrial goods Food Energy
further in February, standing at 1.2%, up from 0.8% in January. At the very early stages of the pricing chain, price pressures recovered somewhat; the annual percentage changes in both oil and non-oil commodity prices moved back into positive territory in February and continued to increase in March Recent developments in wage growth continue to support the notion of a gradual build-up in domestic cost pressures. Annual growth in compensation per employee was 2.2% in the fourth quarter of 2018, remaining above its long-term o.erage. The decline from 2. 5% in the previous quarter was linked to one-off ayments in that quarter As negotiated wage growth had continued to increase, risir from 2.1% in the third quarter of 2018 to 2.2% in the fourth quarter, the decline in growth of compensation per employee was reflected in a declining wage drift. More generally, wage growth indicators now stand visibly higher than in the first half of 2016 These developments are in line with increasing tightness in the labour market. The impact of rising labour cost pressures on overall domestic price developments was cushioned by profit margins. Price pressures as captured in unit labour costs continued to intensify in the fourth quarter of 2018, mainly reflecting a continued weakening in labour productivity growth. Notwithstanding, the annual percentage change in the gdP deflator remained relatively stable, hovering between 1.3%and 1.5% in 2018, as the overall weakening in the cyclical momentum of the economy, together with deteriorations in the terms of trade(related particularly to the past increases in oil prices), weighed on profit margin developments Market-based measures of longer-term inflation expectations declined, while survey-based expectations remained stable. The five-year forward inflation-linked swap rate five years ahead stood at 1.36%, around 15 basis points lower than the level prevailing in early March(see Chart 8). Despite its fur downward trend beginning in November 2018, the risk-neutral probability of negative average inflation over the next five years, implied by inflation options markets, remains negligible. Nevertheless, the forward profile of market-based measures of inflation expectations continues to point to a prolonged period of low inflation with only a very gradual return to inflation levels below, but close to, 2%. The results of the ECB Survey of Professional Forecasters(SPF) for the second quarter of 2019 show average headline inflation expectations for the euro area of 1.4% in 2019, 1.5% in 2020 and 1.6% in 2021. This represents downward revisions of 0. 1 percentage points for each of these years compared with the previous survey, mainly attributable to a weaker growth outlook and downward surprises in recent inflation outcomes. According to the SPF, average longer-term inflation expectations remained at 1.8% ECB Economic Bulletin, Issue 3/2019- Update on economic and monetary developments Prices and cost
ECB Economic Bulletin, Issue 3 / 2019 – Update on economic and monetary developments Prices and costs 16 further in February, standing at 1.2%, up from 0.8% in January. At the very early stages of the pricing chain, price pressures recovered somewhat; the annual percentage changes in both oil and non-oil commodity prices moved back into positive territory in February and continued to increase in March. Recent developments in wage growth continue to support the notion of a gradual build-up in domestic cost pressures. Annual growth in compensation per employee was 2.2% in the fourth quarter of 2018, remaining above its long-term average. The decline from 2.5% in the previous quarter was linked to one-off payments in that quarter. As negotiated wage growth had continued to increase, rising from 2.1% in the third quarter of 2018 to 2.2% in the fourth quarter, the decline in growth of compensation per employee was reflected in a declining wage drift. More generally, wage growth indicators now stand visibly higher than in the first half of 2016. These developments are in line with increasing tightness in the labour market. The impact of rising labour cost pressures on overall domestic price developments was cushioned by profit margins. Price pressures as captured in unit labour costs continued to intensify in the fourth quarter of 2018, mainly reflecting a continued weakening in labour productivity growth. Notwithstanding, the annual percentage change in the GDP deflator remained relatively stable, hovering between 1.3% and 1.5% in 2018, as the overall weakening in the cyclical momentum of the economy, together with deteriorations in the terms of trade (related particularly to the past increases in oil prices), weighed on profit margin developments. Market-based measures of longer-term inflation expectations declined, while survey-based expectations remained stable. The five-year forward inflation-linked swap rate five years ahead stood at 1.36%, around 15 basis points lower than the level prevailing in early March (see Chart 8). Despite its further decline, which continues a downward trend beginning in November 2018, the risk-neutral probability of negative average inflation over the next five years, implied by inflation options markets, remains negligible. Nevertheless, the forward profile of market-based measures of inflation expectations continues to point to a prolonged period of low inflation with only a very gradual return to inflation levels below, but close to, 2%. The results of the ECB Survey of Professional Forecasters (SPF) for the second quarter of 2019 show average headline inflation expectations for the euro area of 1.4% in 2019, 1.5% in 2020 and 1.6% in 2021. This represents downward revisions of 0.1 percentage points for each of these years compared with the previous survey, mainly attributable to a weaker growth outlook and downward surprises in recent inflation outcomes. According to the SPF, average longer-term inflation expectations remained at 1.8%
Chart 8 Market and survey-based measures of inflation expectations ●●●● 3.0 -0.5 20 820192020202120222023 Notes: The SPF survey for the second quarter of 2019 was conducted between 18 and 22 March 2019. The market-implied one-year spot inflation rate and the one-year forward rate one year ahead, the one-year forward rate two years ahead, the three years ahead and the one-year forward rate four years ahead. The latest observations for market-implied ECB Economic Bulletin, Issue 3/2019- Update on economic and monetary developments Prices and cost
ECB Economic Bulletin, Issue 3 / 2019 – Update on economic and monetary developments Prices and costs 17 Chart 8 Market and survey-based measures of inflation expectations (annual percentage changes) Sources: ECB Survey of Professional Forecasters (SPF), ECB staff macroeconomic projections for the euro area and Consensus Economics. Notes: The SPF survey for the second quarter of 2019 was conducted between 18 and 22 March 2019. The market-implied curve is based on the one-year spot inflation rate and the one-year forward rate one year ahead, the one-year forward rate two years ahead, the one-year forward rate three years ahead and the one-year forward rate four years ahead. The latest observations for market-implied inflation are for 9 April 2019. -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 SPF second quarter of 2019 SPF first quarter of 2019 SPF fourth quarter of 2018 ECB staff macroeconomic projections (March 2019) Consensus Economics forecasts (14 March 2019) Market-based measures of inflation expectations (April 2019) HICP
Money and credit Broad money growth rebounded in February. The annual growth rate of M3 increased to 4.3% in February from 3.8% in January, thereby continuing to hover around the rates observed since early 2018 ( see Chart 9). The phasing-out of net asset purchases at the end of 2018 has led to a smaller positive impact of the asset purchase programme(APP)on M3 growth. The annual growth rate of M1, the main contributor to M3 growth from a component perspective increased to 6.6% in February(up from 6.2% in January). Given that real M1 growth tends to lead real GDP growth by about one year(see Box 4 The predictive power of real M1 for real economic activity in the euro area), these developments are consistent with the current moderation in real economic activity. Looking ahead the current level of real M1 growth indicates a low probability of a recession in the euro area in the coming Chart 9 M3 and its counterpart (annual percentage changes; contributions in percentage points; adjusted for seasonal and calendar effects) ■M3 Credit to general govemment from MFIs excluding the Eurosystem sector Inflows from longer-term financial liabilities and other counterparts Halutmatlilaly 2015 2019 Souroe: ECB Notes: Credit to the private sector includes MFI loans to the private sector and MFI holdings of securities issued by the euro area private non-MFI sector. As such, it also cowers the Eurosystems purchases of non-MFI debt securities under the corporate sector purchase programme. The latest observation is for February 2019. M3 growth remained resilient to the fading- out of the contribution of the APP. From a counterpart perspective, the positive contribution to M3 growth from general government securities held by the Eurosystem decreased further(see the red bars in Chart 9)in the context of the aforementioned phasing-out of net purchases under the APP. Until October 2018 it had been largely offset by an increase in the contribution from credit to the private sector(see the blue bars in Chart 9). While credit to the private sector has remained the largest driver of broad money growth in recent months, its contribution has stagnated. Since October 2018 an increasingly positive contribution from net extemal assets (see the yellow bars in Chart 9)-which, among other things, reflects a reduced preference on the part of euro area investors for foreign assets-and a declining drag from credit to the government from euro area monetary financial institutions(MFIs)excluding the Eurosystem(see the light green ECB Economic Bulletin, Issue 3/2019- Update on economic and monetary developments
ECB Economic Bulletin, Issue 3 / 2019 – Update on economic and monetary developments Money and credit 18 5 Money and credit Broad money growth rebounded in February. The annual growth rate of M3 increased to 4.3% in February from 3.8% in January, thereby continuing to hover around the rates observed since early 2018 (see Chart 9). The phasing-out of net asset purchases at the end of 2018 has led to a smaller positive impact of the asset purchase programme (APP) on M3 growth. The annual growth rate of M1, the main contributor to M3 growth from a component perspective, increased to 6.6% in February (up from 6.2% in January). Given that real M1 growth tends to lead real GDP growth by about one year (see Box 4 “The predictive power of real M1 for real economic activity in the euro area”), these developments are consistent with the current moderation in real economic activity. Looking ahead, the current level of real M1 growth indicates a low probability of a recession in the euro area in the coming year. Chart 9 M3 and its counterparts (annual percentage changes; contributions in percentage points; adjusted for seasonal and calendar effects) Source: ECB. Notes: Credit to the private sector includes MFI loans to the private sector and MFI holdings of securities issued by the euro area private non-MFI sector. As such, it also covers the Eurosystem’s purchases of non-MFI debt securities under the corporate sector purchase programme. The latest observation is for February 2019. M3 growth remained resilient to the fading-out of the contribution of the APP. From a counterpart perspective, the positive contribution to M3 growth from general government securities held by the Eurosystem decreased further (see the red bars in Chart 9) in the context of the aforementioned phasing-out of net purchases under the APP. Until October 2018 it had been largely offset by an increase in the contribution from credit to the private sector (see the blue bars in Chart 9). While credit to the private sector has remained the largest driver of broad money growth in recent months, its contribution has stagnated. Since October 2018 an increasingly positive contribution from net external assets (see the yellow bars in Chart 9) – which, among other things, reflects a reduced preference on the part of euro area investors for foreign assets – and a declining drag from credit to the government from euro area monetary financial institutions (MFIs) excluding the Eurosystem (see the light green -6 -4 -2 0 2 4 6 8 10 2013 2014 2015 2016 2017 2018 2019 M3 Net external assets General government debt securities held by the Eurosystem Credit to general government from MFIs excluding the Eurosystem Credit to the private sector Inflows from longer-term financial liabilities and other counterparts
bars in Chart 9) have contributed to the resilience of M3 growth. At the same tim increasing issuance activity of MFI longer-term debt securities has somewhat dampened money creation(see the dark green bars in Chart 9) Following a decrease in January, the annual growth of loans to the private sector increased again in February. The annual growth rate of MFI loans to the private sector(adjusted for loan sales, securitisation and notional cash pooling) increased to 3. 2% in February from 3.0%in January(see Chart 10). This was due to a rebound in the annual growth rate of loans to NFCs, which increased to 3. 7% in February from 3. 4%in January, mainly reflecting a base effect. Looking beyond short-term volatility, the annual growth rate of loans to NFCs has been on a moderating path in recent months, in line with the typical lagged reaction to the slowdown in economic activity observed since early 2018. At the same time, the annual growth rate of loans to households remained stable at 3.3% in February. The expansion in loan growth has been supported by the significant decline in bank lending rates across the euro area since mid-2014 (notably owing to the ECB's non-standard monetary policy measures)and by overall improvements in the supply of, and demand for, bank loans. In addition, banks have made progress in consolidating their balance sheets, although the volume of non-performing loans (NPLs)remains high in some countries and may constrain financial intermediation Chart 10 oans to the private sector m Loans to the private sector 2016 2017 2018 2019 otes: Loans are adjusted for loan sales, securitisation and notional cash pooling. The latest observation is for February 2019. According to the April 2019 euro area bank lending survey, loan growth continued to be supported by favourable overall bank lending conditions and increasing demand for housing loans. In the first quarter of 2019 credit standards for loans to enterprises remained broadly unchanged which was somewhat more favourable than expected by banks in the previous survey round. At the credit standards for households tightened. Banks' cost of funds and balance constraints contributed to a tightening of credit standards across all loan categories e also Chapter 3 of the "Financial Stability Review, ECB, November 2018 ECB Economic Bulletin, Issue 3/2019- Update on economic and monetary developments
ECB Economic Bulletin, Issue 3 / 2019 – Update on economic and monetary developments Money and credit 19 bars in Chart 9) have contributed to the resilience of M3 growth. At the same time, increasing issuance activity of MFI longer-term debt securities has somewhat dampened money creation (see the dark green bars in Chart 9). Following a decrease in January, the annual growth of loans to the private sector increased again in February. The annual growth rate of MFI loans to the private sector (adjusted for loan sales, securitisation and notional cash pooling) increased to 3.2% in February from 3.0% in January (see Chart 10). This was due to a rebound in the annual growth rate of loans to NFCs, which increased to 3.7% in February from 3.4% in January, mainly reflecting a base effect. Looking beyond short-term volatility, the annual growth rate of loans to NFCs has been on a moderating path in recent months, in line with the typical lagged reaction to the slowdown in economic activity observed since early 2018. At the same time, the annual growth rate of loans to households remained stable at 3.3% in February. The expansion in loan growth has been supported by the significant decline in bank lending rates across the euro area since mid-2014 (notably owing to the ECB’s non-standard monetary policy measures) and by overall improvements in the supply of, and demand for, bank loans. In addition, banks have made progress in consolidating their balance sheets, although the volume of non-performing loans (NPLs) remains high in some countries and may constrain financial intermediation.2 Chart 10 Loans to the private sector (annual growth rate) Source: ECB. Notes: Loans are adjusted for loan sales, securitisation and notional cash pooling. The latest observation is for February 2019. According to the April 2019 euro area bank lending survey, loan growth continued to be supported by favourable overall bank lending conditions and increasing demand for housing loans. In the first quarter of 2019 credit standards for loans to enterprises remained broadly unchanged, which was somewhat more favourable than expected by banks in the previous survey round. At the same time, credit standards for households tightened. Banks’ cost of funds and balance sheet constraints contributed to a tightening of credit standards across all loan categories, 2 See also Chapter 3 of the “Financial Stability Review”, ECB, November 2018. -4 -2 0 2 4 6 2012 2013 2014 2015 2016 2017 2018 2019 Loans to the private sector Loans to households Loans to NFCs