Thomas Warmedinger The euro area economy: Division ... · 7/10/2018 · Note: The horizontal axis shows the publication date of the forecast. Systematic over-prediction of headline

The euro area economy: Economic conditions, inflation and prospects

Thomas Warmedinger Division Business Cycle AnalysesDG Economic Developments

Gerrit KoesterDivision Prices & CostsDG Economic Developments

Central Banking SeminarFrankfurt am Main, 10 July 2018

ECB-PUBLIC

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1.1

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Economic analysis at the ECB

Recent conjunctural developments

Economic analysis and conjunctural assessment

1.2 Main features of the euro area economy

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Euro area inflation through the lens of the Phillips Curve

Inflation outlook

Inflation developments in the euro area

Structural drivers of inflation

2.1

2.3

2.2

Recent developments in euro area inflation2.1

1.4 Business cycle synchronisationEconomic

Overview ECB-PUBLIC

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Full set of information

Economicanalysis

Monetaryanalysis

Governing Counciltakes monetary policy decisions based on

a unified overall assessment of the risks to price stability

Crosschecking

Economic analysis as part of the information set to inform monetary policy decisions

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ECB-PUBLICEconomic Analysis at the ECB

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• Assessment of short to medium-term determinants of price developments

• Forward-looking assessment of relevant information from a variety of indicators (e. g. business cycle, wages, exchange rate, asset prices, financial yields, fiscal policy, etc.)

• Quarterly macroeconomic projections for inflation and growth in the euro area, prepared by staff of the Eurosystem/ ECB

Monitoring Analysing Forecasting

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Economic Analysis at the ECB ECB-PUBLIC

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Inflation outlook



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1.4 Business cycle synchronisation

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Size and per capita income – international comparison

Main features of the euro area economy

Source: Worldbank, International Comparison Database.Note: Data are for 2017.

19.415.0

5.6

23.3

59.5

43.8 43.9

16.8

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United States Euro area Japan China

GDP, PPP (current international $)

GDP per capita, PPP (current international $)

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Source: Worldbank International Comparison Database, ECB staff calculations .Note: Data are for 2017. The share in world GDP is calculated by dividing the country’s annual GDP based on PPP by the aggregated annual world GDP in a given year.

Share in world GDP (GDP based on PPP, in %, annual data)Advanced economies share in world GDP is shrinking

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United States Euro area Japan China

1999 2017

ECB-PUBLICMain features of the euro area economy

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Sources: Eurostat and ECB calculations.

GDP growth across euro area countries (averages of annual percentage changes)

GDP growth heterogeneous across countries

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DE FR IT ES NL BE AT GR FI PT IE SK LU SI CY EE MT euroarea

1999-2007 2008- 2017 1999-2017

ECB-PUBLICMain features of the euro area economy

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Sources: Eurostat and ECB calculations.Note: the peaks are defined by the CEPR Euro Area Business Cycle Dating Committee.Latest observations: 2018Q1 for the euro area.


Real GDP(index: business cycle peak = Q = 100)

The euro area has emerged from an unusually deep and protracted recession

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95

100

105

110

115

120

Q Q+4 Q+8 Q+12 Q+16 Q+20 Q+24 Q+28 Q+32 Q+36

1974Q3 1980Q11992Q1 2008Q12007Q4 (US) 2008Q1 (UK)

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Euro area potential output and its components(Potential growth in %, components in pp.)

Source: European Commission. Sources: ECB staff calculations. ECB Economic Bulletin 2018/3

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Output gap estimate of an Unobserved Components Model

(in % of potential output)

Potential growth recovered somewhat since the crisis; strong real GDP growth seen in 2013-2017 led to the gradual closing of the output gap

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

TFP capital labour potential growth

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

+/-2 standard deviations uncertainty band

output gap, Unobserved Components Model

ECB-PUBLICRecent conjunctural developments

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Employment, total hours worked, unemployment rate and the GDP

(index, 2008Q1 = 100; percentage of the labour force)

12 www.ecb.europa.eu ©

Labour supply in the euro area and the largest countries

(index, 2008Q1 = 100)

Sources: Eurostat and ECB calculations.Latest data: 2018 April for the unemployment rate, 2018Q1 for the rest.

Sources: Eurostat and ECB calculations.Latest data: 2018Q1.

Favourable labour market developments support economic expansion

0

2

4

6

8

10

12

14

16

92

94

96

98

100

102

104

106

108

2008 2010 2012 2014 2016 2018

Unemployment rate (rhs) Employment

Total hours worked GDP

97

98

99

100

101

102

103

104

105

106

97

98

99

100

101

102

103

104

105

106

2008 2010 2012 2014 2016 2018

DE ES FR IT EA other countries


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Sources: Eurostat and ECB calculation.Note: All income components are deflated with the GDP deflator. The contribution from the terms-of-trade is proxied by the differential in the GDP and consumption deflator. Total disposable income is deflated with the consumption deflator. Last observation: 2017Q4.

Real disposable income growth mainly supported by real compensation


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14Sources: Markit, DG-ECFIN and Eurostat.Latest data: 2018Q1 for GDP, June 2018 for the ESI and PMI.

Euro area real GDP, composite PMI and ESI(q-o-q % change, diffusion index and percentage balance)

Some softening in growth since the beginning of 2018

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

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40

45

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60

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Real GDP (rhs) ESI (lhs) Composite PMI (lhs)


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Euro area: real GDP growth(in percent change quarter ago) • Growth moderated at beginning of

2018• Annual GDP growth projected to

decline from 2.1% in 2018 to 1.7% in 2020

• Continued expansion over medium term supported by

• ECB’s accommodative monetary policy stance

• Lower deleveraging needs• Rising profits• Growth in foreign demand

• Gradual slowdown in growth due to

• Declining impact from past monetary policy measures

• Labour supply shortages

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Source: ECB, June 2018Note: See ECB website, 14 June 2018.

Medium-term growth outlook

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020


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Shares of countries with current GDP growth exceeding the past 3-year average

(quarterly data)

Source: OECD, Eurostat, ECB projections database.Notes: World economy is based on real GDP growth rates (YoY) calculated for 31 countries + EA aggregate, accounting for 92% of global GDP in PPP. The euro area economy consists of the current 19 EA member countries. Shaded area refers to the projection horizon

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0

25

50

75

100

1996 2000 2004 2008 2012 2016 2020

Euro area countries Global group of countries

Source: OECD, Eurostat, ECB projections database.Notes: the global group consists of the Euro Area, US, Japan, UK, China, India, S. Korea, Russia, Brazil, Mexico and Turkey (i.e. the countries with available potential output growth estimates). Shaded area refers to the projection horizon.

Shares of countries with a positive GDP-potential output growth differential

(annual data)

0

25

50

75

100

1998 2002 2006 2010 2014 2018

EA countries World economies

Business cycle synchronisation ECB-PUBLIC

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Share of output growth variance explained by the first principal component over a 5-

year rolling window(quarterly data)

Source: OECD, Eurostat, ECB projections database.Notes: Based on the 5-year rolling window estimates of the first principle component of quarterly year-on-year GDP growth rates over the period 1970Q1-2020Q4.. Grey shaded area refers to the projection horizon 18

Source: OECD, Eurostat, ECB projections database.Note: Moran’s index is a weighted average single measure summarising the panel of pair-wise cross-country correlations. Grey shaded area refers to the projection horizon.

0.00

0.25

0.50

0.75

1.00

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

EA-13 G-7

Cross-country (spatial) correlations over a 5-year rolling window

(quarterly data)

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100

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

EA-13 G-7

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Inflation outlook



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Overview ECB-PUBLIC

RubricSome basics: What is included in HICP headline inflation?

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Energy, 10%

Unprocessed food, 7%

Processed food including alcohol

and tobacco, 12%

Non-energy industrial goods,

26%

Services, 44%

Source: Eurostat.

Weights of HICP components(in %)

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RubricEuro area inflation developments in long-term perspective

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Sources: Eurostat and ECB calculations.Note: Latest observations are for June 2018 (flash estimates). The cumulative averages are the averages of the annual inflation rates from January 1999 to each month.

HICP and HICP excluding energy and food(annual percentage changes)

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

HICPHICP excluding energy and foodHICP - cumulative average since 1999HICP excl. energy and food - cumulative average since 19992% inflation benchmark

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Evolution of projections for average headline inflation in 2014, 2015, 2016 and 2017

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Source: Ciccarelli and Osbat (2017), “Low inflation in the euro area: Causes and consequences”, ECB OP no. 181.Data sources: ECB, IMF, European Commission, OECD, Consensus Economics, Eurozone Barometer. Note: The horizontal axis shows the publication date of the forecast.

Systematic over-prediction of headline inflation in 2014-2016

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Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2016 2017

HICP average for 2017 (Jan-Dec)

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0.0

0.5

1.0

1.5

2.0

2.5

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2015 2016


-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2014 2015


-0.5

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0.5

1.0

1.5

2.0

2.5

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

2013 2014

ECB/Eurosystem (range) European CommissionIMF OECDSPF Eurozone BarometerConsensus ECB/EurosystemHICP average for 2014 (Jan-Dec)

2014 2015

2016 2017

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RubricHeadline inflation was suppressed by (unexpected) falls in commodity prices

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Contributions to the decline in HICP inflation

(overall index: annual growth rates; and contributions in p.p.)

Sources: Eurostat and ECB staff calculations. Note: Latest observation: June 2018 (flash estimates). The base period refers to the latest peak.

Brent crude oil, food and metals prices

(lhs: USD per barrel for oil; rhs: index food/metal)

Source: ECB. Notes: The index for metals is composed of Aluminium, Lead, Copper, Nickel, Zinc and Tin. Latest observations refer to July 6 2018 for oil, and to June 29 2018 for food and metals.

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2011 2012 2013 2014 2015 2016 2017

Energy FoodNEIG ServicesHeadline HICP HICP - Base period (10/2011)

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100

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2011 2012 2013 2014 2015 2016 2017 2018

Oil (USD/barrel) Food (2010=100) Metals (2010=100)

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RubricUnderlying inflation has remained muted ….

Measures of underlying inflation(annual percentage changes, percent)

Sources: Eurostat and ECB calculations.Notes: The range includes exclusion-based measures, trimmed means and a weighted median. Latest observation: June 2018 (flash estimate) for HICP excluding energy and food; May 2018 for the rest.

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Share of items with high/low inflation in HICP excluding food and energy

(unweighted share)

Sources: Eurostat and national statistical offices Notes: The coloured areas reflect the unweighted share of items in HICP excluding food and energy within the respective range. Latest observation: May 2018.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2005 2008 2011 2014 2017

<-1 -1<=π<0 0<=π<1 1<=π<2 >=2

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2002 2004 2006 2008 2010 2012 2014 2016 2018

HICP excluding energy and food

HICP excluding energy, food, travel-related items and clothing

Long-term average HICP excluding energy and food

ECB-PUBLIC

Rubric…. mainly driven by services inflation

HICP non-energy industrial goods (NEIG) (annual percentage change, percentage point contributions)

Sources: Eurostat and ECB calculations.Latest observations: June 2018 (flash estimate) for HICP non-energy industrial goods, and May 2018 for the rest.

Sources: Eurostat and ECB calculations.Latest observations: June 2018 (flash estimate) for services HICP, and May 2018 for the rest.

HICP services (annual percentage change, percentage point contributions)

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June 18:1.3

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2010 2011 2012 2013 2014 2015 2016 2017 2018

Travel relatedRestaurantsHousingCommunicationsOtherServices HICPLong-term average (since 1999)

June 18:0.4

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2010 2011 2012 2013 2014 2015 2016 2017 2018

Durable goodsSemi-durable goodsNon-durable goodsNon-energy industrial goodsLong-term average (since 1999)

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Strong employment growth, but wage growth picked up only recently

Labour costs and unemployment developments

(lhs: annual percentage changes; rhs: percentage)

Sources: Eurostat, ECB calculations. Latest observation: 2018Q2 for the unemployment rate (based on April and May 2018) and 2018Q1 for the rest.

Decomposition of wage developments(annual percentage changes, percentage point contributions,

quarterly data)

Sources: Eurostat and ECB calculations.Note: The latest observation refers to 2018Q1. Dashed line reflects long-term average of compensation per employee since 1999Q1.

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8

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12

130.0

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2006 2008 2010 2012 2014 2016 2018

Compensation per employee

Compensation per hour

Unemployment rate (rhs, inverted)

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2005 2007 2009 2011 2013 2015 2017

Wage driftSocial security contributionsNegotiated wagesCompensation per employee growthLong-term average since 1999

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Inflation outlook



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Overview ECB-PUBLIC

RubricThick modelling of the price Phillips Curve

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Set of hybrid New Keynesian Phillips Curves

(1) output gap – ECB estimates;(2) GDP growth; (3) unemployment rate; (4) unemployment gap – ECB estimates(5) output gap – EC estimates

ECB-PUBLIC

RubricInflation has been at the lower end of a range of Phillips Curves in the EA

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Conditional Phillips curve forecast for the post-crisis period(HICP inflation excluding energy and food; annual percentage changes)

Sources: Eurostat and ECB calculations. Notes: The starting point of the forecast is the second quarter of 2012. The last observation is 2018Q1. The grey range covers the conditional forecast of HICP inflation excluding energy and food from an equation where it isregressed on its lag, lagged import prices, a lagged measure of slack (combining output gap model-based estimates, GDP growth, the unemployment rate, the unemployment gap and the output gap – the latter based on European Commission estimates) and a measure of inflation expectations (based on quarterly Consensus Economics measures with horizons from one to seven quarters and Survey of Professional Forecasters measuresone, two and five years ahead).First published in : Ciccarelli and Osbat (2017), “Low inflation in the euro area: Causes and consequences”, ECB OP no. 181.For details see: ECB Annual Report 2017; chapter 1.1; box 2.

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17Q

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18Q

1

actual HICP inflation excluding energy and food

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Inflation outlook



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Overview ECB-PUBLIC

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Demographics

Digitalisation/E-commerce

Structural changes in the labour market and their impact on wage

growth

Globalisation

Structural change in the oil market

Which structural drivers could have played a role for inflation developments? ECB-PUBLIC

RubricIncreasingly common pattern of inflation around the globe

32

Range of headline inflation in advanced and emerging economies over time

(annual percentage changes)

Headline inflation developments in OECD and EA countries

(annual percentage changes)

Source: Haver.Latest observations: The latest observation is for 2017 (annual data).Note: The interquartile range covers 50% of the samples of emerging and advanced economies. Thesample includes 17 advanced economies (Australia, Austria, Belgium, Canada, France, Germany,Greece, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, theUnited States) and 25 emerging economies (Bolivia, Chile, Colombia, Côte d'Ivoire,Ecuador, Egypt, El Salvador, Guatemala, Honduras, Indonesia, Israel, Jamaica, South Korea, Malaysia,Mauritius, Mexico, Nigeria, Paraguay, the Philippines, Singapore, South Africa, Taiwan, Thailand,Tunisia, Turkey). Only countries for which data going back to 1970 are available have been included.

Sources: OECD, Eurostat, and ECB calculationsLatest observations: June 2018 (flash estimate) for the Euro Area, and May 2018 for the non-euro areaOECD countries. Monthly data.

See for details: ECB Economic Bulletin 04/2017: Domestic and global drivers of inflation in the euro area

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20

25

30

35

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Interquartile range of EMEInterquartile range of Advanced EconomiesMedian of EMEMedian of advanced economies

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1

2

3

4

5

6

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

OECD (excluding euro area) headline Euro area headline HICP

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RubricAugmenting PCs with foreign slack helps only slightly to forecast HICPX

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Conditional forecasting HICPX: actual and conditional out-of-sample projection

(thick modelling approach)

Foreign and euro area output gap(percentage points)

Sources: ECB calculations based on Eurostat, IMF, Consensus Economics and SPF data.Notes: Results based on a thick-modelling approach including a broad range of fixed-coefficient specifications of the Phillips curve including either only domestic or domesticand foreign slack. The parameters are estimated over the sample 1995Q1 to 2018Q1. Theconditional out-of-sample forecast is done for 2012Q1 to 2018Q1. The ranges depictforecasts for HICP excl. energy and food coming from differently specified Phillips curves.The specifications include permutations across the expectation formation (backward- orforward-looking) and the variables representing economic activity/slack.

Source: ECB calculations.Notes: The EA output gap comes form the European Commission. Foreign output gap(data/projection) is trade-weighted and based on the latest IMF WEO data. The “EA output gapnot explained by foreign output gap” is derived by an auxiliary regression (regressing thedomestic on the global output gap). Includes data up to 2018Q1.

Source: See “: “Domestic and global drivers of inflation in the euro area”, ECB Economic Bulletin4/2017, and C. Nickel, 2017, http://voxeu.org/article/role-foreign-slack-domestic-inflation-eurozone

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2001

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EA Output Gap

Foreign output gap

EA output gap not explained by foreign output gap

0.0

0.5

1.0

1.5

2.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

2012 2013 2014 2015 2016 2017 2018

Actual HICPX

Overlapping range of model estimates

Range of models including only domestic slack

Range of models including domestic and foreign slack

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Inflation outlook



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Overview ECB-PUBLIC

RubricOutlook for euro area inflation until 2020

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HICP and HICP excluding energy and food(annual percentage changes)

Sources: Eurostat and ECB calculations.Note: Latest observations are for June 2018 (flash estimates). The cumulative averages are the averages of the annual inflation rates from January 1999 to each month.

2.0

1.0

-1

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1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

HICP HICP - cumulative average since 1999

HICP June BMPE HICP excluding energy and food

HICP excl. energy and food - cumulative average since 1999 HICPX June BMPE

2% inflation benchmark

ECB-PUBLIC

RubricSUMMING UP: Economic Analysis at the ECB

Full set of information

Economicanalysis

Monetaryanalysis

Governing Counciltakes monetary policy decisions based on

a unified overall assessment of the risks to price stability

Crosschecking

Economic analysis as part of the information set to inform monetary policy decisions

36

ECB-PUBLIC

Thomas Warmedinger The euro area economy: Division ... · 7/10/2018 · Note: The horizontal axis shows the publication date of the forecast. Systematic over-prediction of headline

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