Economic Bulletin Issue 8 / 2024
ECB Economic Bulletin, Issue 8 / 2024 – Contents 1 Contents Economic, financial and monetary developments 2 Overview 2 1 External environment 8 2 Economic activity 13 3 Prices and costs 20 4 Financial market developments 27 5 Financing conditions and credit developments 33 6 Fiscal developments 40 Boxes 44 1 What’s behind the resilience of US equity prices – market structure, earnings expectations or equity risk premia? 44 2 The effects of the Emissions Trading System on European investment in the short run 50 3 What are the economic signals from uncertainty measures? 55 4 What explains the high household saving rate in the euro area? 59 5 Monetary policy pass-through to goods and services inflation: a granular perspective 64 6 Liquidity conditions and monetary policy operations from 24 July to 22 October 2024 69 7 TLTRO III phase-out and bank lending conditions 75 Articles 80 1 Energy shocks, corporate investment and potential implications for future EU competitiveness 80 2 Explaining the resilience of the euro area labour market between 2022 and 2024 90 Box 1 Labour market developments in the euro area compared with other advanced economies 94 3 Four years into the Next Generation EU programme: an updated preliminary evaluation of its economic impact 110 Statistics S1
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Overview 2 Economic, financial and monetary developments Overview At its meeting on 12 December 2024, the Governing Council decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – was based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The disinflation process is well on track. According to the December 2024 Eurosystem staff macroeconomic projections for the euro area, headline inflation is expected to average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027 when the expanded EU Emissions Trading System becomes operational. For inflation excluding energy and food, staff project an average of 2.9% in 2024, 2.3% in 2025 and 1.9% in both 2026 and 2027. Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis. Domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. Financing conditions are easing, as the Governing Council’s recent interest rate cuts gradually make new borrowing less expensive for firms and households. But they continue to be tight because monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit. In the December 2024 projections, staff now expect a slower economic recovery than in the September 2024 ECB staff macroeconomic projections for the euro area. Although growth picked up in the third quarter, survey indicators suggest it has slowed in the fourth quarter. Staff see the economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. The projected recovery rests mainly on rising real incomes – which should allow households to consume more – and firms increasing investment. Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand. The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Overview 3 Economic activity The economy grew by 0.4% in the third quarter of 2024, exceeding expectations. Growth was driven mainly by an increase in consumption, partly reflecting one-off factors that boosted tourism over the summer, and by firms building up inventories. But the latest information suggests it is losing momentum. Surveys indicate that manufacturing is still contracting and growth in services is slowing. Firms are holding back their investment spending in the face of weak demand and a highly uncertain outlook. Exports are also weak, with some European industries finding it challenging to remain competitive. The labour market remains resilient. Employment grew by 0.2% in the third quarter of 2024, again by more than expected. The unemployment rate remained at its historical low of 6.3% in October. Meanwhile, demand for labour continues to weaken. The job vacancy rate declined to 2.5% in the third quarter, 0.8 percentage points below its peak, and surveys also point to fewer jobs being created in the fourth quarter. The euro area economy is set to continue its gradual recovery over the coming years, amid significant geopolitical and policy uncertainty. In particular, rising real wages and employment, in a context of robust labour markets, are expected to support a recovery in which consumption remains one of the main drivers. Domestic demand should also be bolstered by an easing of financing conditions, in line with market expectations of the future path of interest rates. Although surrounded by high uncertainty, fiscal policies are assumed to be on a consolidation path overall. Nevertheless, funds from the Next Generation EU programme should support growth until the expiry of the programme in 2027. Under the baseline assumption that the trade policies of Europe’s key trading partners remain unchanged, foreign demand is expected to strengthen and support euro area exports. As a result, net trade is expected to make a broadly neutral contribution to GDP growth, despite existing competitiveness challenges. The unemployment rate is set to decline further to historically low levels. As some of the cyclical factors that have recently reduced productivity start to unwind, productivity is expected to pick up over the projection horizon, although structural challenges remain. Overall, according to the December 2024 projections, annual average real GDP growth is projected to be 0.7% in 2024, 1.1% in 2025 and 1.4% in 2026, before moderating to 1.3% in 2027. Compared with the September 2024 projections, the outlook for GDP growth has been revised down, mainly owing to revisions to data on investment in the first half of 2024, expectations of weaker export growth in 2025, and a small downward revision to the projected expansion of domestic demand in 2026. Fiscal and structural policies should make the economy more productive, competitive and resilient. It is crucial to swiftly follow up, with concrete and ambitious structural policies, on Mario Draghi’s proposals for enhancing European competitiveness and Enrico Letta’s proposals for empowering the Single Market. The Governing Council welcomes the European Commission’s assessment of governments’ medium-term plans for fiscal and structural policies, as part of the EU’s revised economic governance framework. Governments should now focus on implementing their
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Overview 4 commitments under this framework fully and without delay. This will help bring down budget deficits and debt ratios on a sustained basis, while prioritising growthenhancing reforms and investment. Inflation Annual inflation increased to 2.3% in November according to Eurostat’s flash estimate, from 2.0% in October. The increase was expected and primarily reflected an energy-related upward base effect. Food price inflation edged down to 2.8% and services inflation to 3.9%. Goods inflation went up to 0.7%. Domestic inflation, which closely tracks services inflation, again eased somewhat in October. But at 4.2%, it remains high. This reflects strong wage pressures and the fact that some services prices are still adjusting with a delay to the past inflation surge. That said, underlying inflation is overall developing in line with a sustained return of inflation to target. Most measures of longer-term inflation expectations stand at around 2%, and market-based indicators of medium to longer-term inflation compensation have decreased measurably since the Governing Council’s meeting on 17 October 2024. The increase in compensation per employee moderated to 4.4% in the third quarter of 2024 from 4.7% in the second. Amid stable productivity, this contributed to slower growth in unit labour costs. Easing labour cost pressures and the continuing impact of the Governing Council’s past monetary policy tightening on consumer prices should help inflation to settle sustainably at around the 2% medium-term target, as previous sharp falls in energy prices continue to drop out of the annual rates. In the December 2024 projections, headline HICP inflation is projected to rise in late 2024, before declining to hover around the ECB’s inflation target of 2% from the second quarter of 2025. Base effects in the energy component are expected to be the main driver of the temporary increase in inflation at the start of the projection horizon. Based on assumptions of declining oil and gas prices, energy inflation is likely to remain negative until the second half of 2025 and to stay subdued thereafter, except for an uptick in 2027 owing to the introduction of new climate change mitigation measures. Food inflation is projected to rise until mid-2025, driven mostly by resurging unprocessed food price dynamics, before declining to an average of 2.2% by 2027. HICP inflation excluding energy and food (HICPX) is expected to decline in early 2025 as the indirect effects of past energy price shocks fade, labour cost pressures recede and the lagged impacts from past monetary policy tightening continue to feed through to consumer prices. This decline is expected to be led by a decrease in services inflation – which has thus far been relatively persistent. Overall, HICPX inflation is expected to moderate from 2.9% in 2024 to 1.9% in 2027. Wage growth will initially remain elevated but will decline gradually as inflation compensation pressures fade. The moderation in the growth of compensation per employee, coupled with a recovery in productivity growth, is
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Overview 5 expected to lead to significantly slower growth in unit labour costs. As a result, domestic price pressures are projected to ease, with profit margins initially buffering the still high labour cost pressures but recovering over the projection horizon. External price pressures should remain moderate overall. Compared with the September 2024 projections, the outlook for headline HICP inflation has been revised down marginally for 2024 and 2025, mainly owing to downward data surprises and lower oil and electricity price assumptions. Risk assessment The risks to economic growth remain tilted to the downside. The risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by geopolitical risks, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, which could disrupt energy supplies and global trade. Growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. It could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster. Inflation could turn out higher if wages or profits increase by more than expected. Upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade. Moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected. By contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Greater friction in global trade would make the euro area inflation outlook more uncertain. Financial and monetary conditions Market interest rates in the euro area have declined further since the Governing Council’s October meeting, reflecting the perceived worsening of the economic outlook. Although financing conditions remain restrictive, the Governing Council’s interest rate cuts are gradually making it less expensive for firms and households to borrow. The average interest rate on new loans to firms was 4.7% in October, more than half a percentage point below its peak a year earlier. The cost of issuing market-based debt has fallen by more than a percentage point since its peak. The average rate on new mortgages, at 3.6% in October, is about half a percentage point lower than at its highest point in 2023, even though the average rate on the outstanding stock of mortgages is still set to rise.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Overview 6 Bank lending to firms has gradually picked up from low levels, and increased by 1.2% in October compared with a year earlier. Debt securities issued by firms were up 3.1% in annual terms, which was similar to the increase in the previous few months. Mortgage lending continued to rise gradually in October, with an annual growth rate of 0.8%. In line with its monetary policy strategy, the Governing Council thoroughly assessed the links between monetary policy and financial stability. Euro area banks remain resilient and there are few signs of financial market stress. Financial stability risks nonetheless remain elevated. Macroprudential policy remains the first line of defence against the build-up of financial vulnerabilities, enhancing resilience and preserving macroprudential space. Monetary policy decisions The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility were decreased to 3.00%, 3.15% and 3.40% respectively, with effect from 18 December 2024. The asset purchase programme portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities. In the second half of 2024, the Eurosystem no longer reinvested all of the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council discontinued reinvestments under the PEPP at the end of 2024. Banks repaid the remaining amounts borrowed under the targeted longer-term refinancing operations in December 2024, which concluded this part of the balance sheet normalisation process. Conclusion At its meeting on 12 December 2024, the Governing Council decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – was based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Overview 7 In any case, the Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises sustainably at its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments External environment 8 1 External environment Over the review period (from 17 October to 11 December 2024) global economic growth remained strong, despite increasing headwinds. Survey data pointed to broad-based improvements across sectors, with the services sector continuing to perform strongly. Global trade remained robust, reflecting to some extent frontloading of goods imports amid uncertainty surrounding future US trade policy. Inflation continued to moderate but upward pressures on services prices remained. The outlook for global growth and inflation, as reflected in the December 2024 Eurosystem staff macroeconomic projections for the euro area, is broadly unchanged from the September 2024 ECB staff macroeconomic projections. However, the outcome of the US presidential elections has added significant uncertainty to international trade policies. Global trade metrics were revised up significantly to reflect stronger data outturns in the second and third quarters. Following the recovery during 2024, global trade is projected to grow more in line with activity, although there are elevated downside risks relating to greater trade protectionism and fragmentation. Inflation across major advanced and emerging market economies is expected to decline gradually over the projection horizon. Global economic activity has remained strong, even though increasing headwinds highlight the fragility of the outlook. The global composite output Purchasing Managers’ Index (PMI) (excluding the euro area) remained firmly in expansionary territory in November 2024 at 53.2, up from 52.8 in October (Chart 1). While services sector activity continued to strengthen, manufacturing activity also improved, edging up further above the no-growth threshold to 51.2 in November. The increase in the composite output PMI indicator was driven in particular by the United States and China. In the case of China, this reflected a strong expansion in the manufacturing sector, while in the United States services sector activity improved significantly. Recent data suggest that global growth remained robust in the fourth quarter of 2024. This is supported by stronger economic data in the United States and China, as well as recently announced fiscal support in China and, to a lesser extent, the United Kingdom. Geopolitical tensions, lingering weakness in the Chinese real estate sector and uncertainties about the policies of the next US Administration also suggest that the global growth outlook is still fragile.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments External environment 9 Chart 1 Global output PMI (diffusion indices) Sources: S&P Global Market Intelligence and ECB staff calculations. Notes: “PMI” stands for Purchasing Managers’ Index. The latest observations are for November 2024. The outlook for global activity is projected to stay strong but to moderate slightly over the projection horizon. Global real GDP is projected to grow by 3.4% in 2024 and 3.5% in 2025, and to decrease to 3.3% in 2026 and 3.2% in 2027. The small decline in global growth later in the projection horizon is due mainly to expectations of slower growth in China, reflecting unfavourable demographics, and some deceleration in the United States. In the United Kingdom, fiscal loosening is assumed to boost real GDP growth only temporarily, as future corporate tax increases are likely to weigh on private sector activity. The outcome of the US elections has brought significant uncertainty since it is difficult at this stage to gauge the policy measures of the new US Administration. The December Eurosystem staff projections incorporate stricter immigration legislation and looser fiscal policies (particularly the extension of personal and corporate income tax cuts, which was introduced in 2017 and is set to expire in 2025). After stronger than expected growth in the third quarter, the pace of global trade is likely to decelerate in the near term. Global imports surprised on the upside in the third quarter, driven by a sharp increase in US trade. Anecdotical evidence suggests that US firms frontloaded imports given the uncertainties about future trade policies and in anticipation of strike action in US East Coast ports in October. While global trade is inherently volatile, incoming data point to a softening in global imports in the fourth quarter. The easing reflects a still weak manufacturing cycle and a normalisation of goods imports following buoyant growth in previous quarters. This is exacerbated by a less favourable composition of global demand, which is currently influenced by the less trade-intensive services sector and public sector consumption. In line with decelerating trade momentum, the global (excluding the euro area) PMI for new export orders in manufacturing remained in contractionary territory, at 49.4, in November. In light of this, shipping costs are also beginning to normalise after the steep increases observed in the second quarter of
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments External environment 10 2024 that reflected higher demand for shipping, consistent with frontloading of imports. Global trade is projected to recover this year and grow more in line with global activity over the rest of the projection horizon, although there are strong downside risks of increased trade protectionism and fragmentation. Global trade growth for 2024 has been revised up by 0.9 percentage points compared with the September 2024 projections, mainly as a result of stronger data outturns in the second and third quarters. Global trade is projected to increase by 3.6% in 2025, before moderating to 3.3% in 2026 and 3.2% in 2027. The outlook, however, remains very uncertain. Further frontloading driven by expectations of trade restrictions could strengthen trade in the short term. In the medium term trade could weaken further in light of ongoing geopolitical tensions, a significant increase in trade protectionism and fragmentation. Inflation across the member countries of the Organisation for Economic Co-operation and Development (OECD) continues to moderate, but underlying price pressures remain. In October the annual headline rate of consumer price index (CPI) inflation across OECD countries (excluding Türkiye) increased marginally to 2.6%, compared with 2.5% in the previous month (Chart 2). The slight increase in headline inflation was due to less negative energy inflation – at -0.8% in October, compared with -2.5% in September – while food and core inflation remained stable. Core inflation, which accounted for 90% of headline inflation in October compared with a median contribution of 64% before the COVID-19 pandemic, is driven notably by elevated services inflation across advanced economies. As services inflation is in turn closely linked to wage growth, which is expected to ease in 2025 as labour markets cool, headline inflation across OECD economies is expected to normalise further. Chart 2 OECD CPI inflation (year-on-year percentage changes) Sources: Organisation for Economic Co-operation and Development (OECD) and ECB staff calculations. Notes: The OECD aggregate excludes Türkiye and is calculated using OECD annual weights of the consumer price index (CPI). The latest observations are for October 2024.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments External environment 11 Since the October Governing Council meeting, Brent crude oil prices have fallen by 2.9% while European gas prices have risen by 17.7%.1 Oil prices experienced significant volatility during the review period, owing primarily to geopolitical tensions in the Middle East. On the demand side, strong fuel consumption in the United States added to upward pressure on prices, as US petrol stocks had fallen to their lowest level since November 2022. This was nevertheless offset by the negative impact of weaker demand for oil in China, which contracted for the sixth consecutive month in September. European gas prices have risen by 17.7% since the October Governing Council meeting, driven by both supply and demand factors. On the supply side, the increase can largely be attributed to the impending expiration of the gas transit agreement between Ukraine and Russia at the end of 2024. Additionally, following an arbitration ruling against Gazprom in favour of the Austrian company OMV, Gazprom threatened to halt its gas supplies. On the demand side, reduced wind farm output in November in Europe has led to increased reliance on gas-fired power generation. This, coupled with cold weather, has significantly decreased gas storage levels across Europe, further contributing to rising gas prices. Meanwhile, metal prices have declined (-4.5%), with China’s stimulus package falling short of expectations. Food prices have increased by 15.9%, driven by supply-related factors. In the United States, economic activity remains robust. In the third quarter of 2024 real GDP continued to grow at a steady pace of 0.7% quarter on quarter, supported by strong domestic private demand and government consumption. In contrast, the contribution of private investment decelerated, while private inventories and net trade also contributed negatively to growth. The US labour market continued to cool, with the unemployment rate 0.1 percentage points higher at 4.2% in November, up from 3.7% at the start of 2024. Annual wage growth ticked up to 4.0% in October – having declined over the year – and remained above the 3-3.5% range that the Federal Reserve System considers to be consistent with its inflation target. Headline CPI inflation also increased slightly to 2.6% in October from 2.4% in September, while core inflation remained at 3.3%. The Federal Open Market Committee (FOMC) decided to cut the federal funds rate by 25 basis points at its November meeting, which had been widely expected.2 Economic growth momentum in China has strengthened but the new fiscal package is not expected to provide much stimulus. Monthly indicators for October turned out stronger than expected, with significant improvements in retail sales and export growth. The recovery in retail sales – extending into early November – has been largely driven by the ongoing trade-in subsidies, with a notable gain in categories subsidised by the Chinese Government. At the same time the new fiscal package announced on 8 November, while substantial, is not expected to boost growth significantly. Aimed at addressing financial stability risk associated with local government debt, the package mainly represents a migration of debt towards bonds with lower service costs. Since it leaves the overall debt level unchanged, it does not produce a direct fiscal impulse. The potential additional 1 The cut-off date for data included in this issue of the Economic Bulletin was 11 December 2024. 2 At its meeting on 18 December – which took place after the review period from 17 October to 11 December – the FOMC lowered the federal funds rate target by another 25 basis points.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments External environment 12 spending associated with lower financing costs is likely to be small, providing only very limited support to growth. Chinese consumer price inflation slowed further in November, easing to 0.2% year on year from 0.3% in September. Producer price inflation remained negative at -2.5% in November, heightening deflationary concerns. Activity in the United Kingdom has continued to slow, while headline inflation has risen owing to higher energy prices. In the third quarter of 2024 UK GDP grew only modestly by 0.1% (quarter on quarter). The Government’s new Autumn Budget entails a 2%-of-GDP increase in public spending, which, together with ongoing monetary easing, is expected to gradually support growth dynamics in 2025. Headline inflation increased significantly to 2.3% in October, from 1.7% in September. At its November meeting the Bank of England lowered the Bank Rate by 25 basis points to 4.75%.3 3 At its meeting on 18 December – which took place after the review period from 17 October to 11 December – the Bank of England decided to keep the Bank Rate unchanged.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Economic activity 13 2 Economic activity The economy grew by 0.4% in the third quarter of 2024, after expanding by 0.2% in the second quarter, amid a recovery in consumption and a build-up of inventories, while net trade contracted. Employment rose by 0.2% in the third quarter, implying some recovery in productivity. Across sectors, industrial activity, excluding Irish intellectual property products, continued to decline in the third quarter, reflecting weak demand, competitiveness losses and rising uncertainty. By contrast, the services sector remained in expansion, boosted mainly by non-market and businessrelated services. Survey indicators point to softening economic activity at the turn of the year. The Purchasing Managers’ Indices (PMIs) for both manufacturing and services have been below their respective third quarter levels in the fourth quarter, while orders and business expectations have declined, implying further weakness at the start of 2025. With regard to domestic demand, private consumption is likely to slow in the fourth quarter, after picking up strongly in the third quarter, as confidence remains low. Also, indicators for housing, business investment and exports suggest continued weakness in the short term. Looking ahead, the projected recovery of real incomes, supported by increased wages and a robust labour market, should allow households to consume more. In addition, foreign demand is expected to strengthen and support euro area exports. This outlook is broadly reflected in the December 2024 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth of 0.7% in 2024, 1.1% in 2025 and 1.4% in 2026 respectively before moderating to 1.3% in 2027.4 According to Eurostat’s latest estimate, real GDP increased by 0.4%, quarter on quarter, in the third quarter of 2024, having expanded by 0.2% in the second quarter (Chart 3). Domestic demand and changes in inventories made a positive contribution to growth in the third quarter, while net trade contracted. Although growth in total investment in the third quarter was positive, it is estimated to have been negative when excluding an unprecedentedly large increase in nonconstruction investment in Ireland. 4 See “Eurosystem staff macroeconomic projections for the euro area, December 2024”, published on the ECB’s website on 12 December 2024.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Economic activity 14 Chart 3 Euro area real GDP and its components (quarter-on-quarter percentage changes; percentage point contributions) Sources: Eurostat and ECB calculations. Note: The latest observations are for the third quarter of 2024. Survey data point to a weaker fourth quarter of 2024. PMI output fell to 49.2 on average in October and November (from 50.3 in the third quarter), on the back of declines both in services and manufacturing. In the manufacturing sector, the PMI continued to contract in the fourth quarter, with the index now having been in contractionary territory for 20 consecutive months (Chart 4). The PMI for new orders also remains below 50, pointing to a weak short-term outlook for industry. In the services sector, the PMI fell below 50 in November – for the first time since January 2024 – although the average for October and November is still in modest growth territory, at 50.5. The European Commission’s business confidence indicators portray a similar picture. After falling in October, the Economic Sentiment Indicator moved broadly sideways in November, suggesting ongoing headwinds are hampering the recovery. The results of the Commission’s survey on factors limiting production for the fourth quarter show that manufacturing is still affected by insufficient demand and labour shortages, compared with the historical averages, while demand is not seen as a limiting factor in the services sector.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Economic activity 15 Chart 4 PMI indicators across sectors of the economy a) Manufacturing b) Services (diffusion indices) (diffusion indices) Source: S&P Global Market Intelligence. Note: The latest observations are for November 2024. Employment increased by 0.2% in the third quarter of 2024. This was broadly the same rate as in the first half of the year (Chart 5). Employment growth was more aligned with GDP growth in the third quarter, allowing for some recovery in productivity, which rose by 0.2%.5 Total hours worked were unchanged in the third quarter, leading to a 0.1% decline in average hours worked. The unemployment rate stood at 6.3% in October, the same as in September, remaining at its lowest level since the euro was introduced. Labour demand has declined somewhat from the high levels seen after the pandemic, with the job vacancy rate falling to 2.5% in the third quarter, 0.1 percentage points lower than in the previous quarter and closer to its pre-pandemic peak. 5 For an overview of the euro area labour market over the past two years, see the article entitled “Explaining the resilience of the euro area labour market between 2022 and 2024” in this issue of the Economic Bulletin.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Economic activity 16 Chart 5 Euro area employment, PMI assessment of employment and unemployment rate (left-hand scale: quarter-on-quarter percentage changes, diffusion index; right-hand scale: percentages of the labour force) Sources: Eurostat, S&P Global Market Intelligence and ECB calculations. Notes: The two lines indicate monthly developments, while the bars show quarterly data. The PMI is expressed in terms of the deviation from 50, then divided by 10 to gauge the quarter-on-quarter employment growth. The latest observations are for the third quarter of 2024 for euro area employment, November 2024 for the PMI assessment of employment and October 2024 for the unemployment rate. Short-term labour market indicators point to stable employment in the fourth quarter of 2024. The monthly composite PMI employment indicator increased slightly from 49.2 in October to 49.4 in November, suggesting that employment in the fourth quarter is likely to be broadly unchanged. The PMI services indicator increased from 50.3 in October to 51.0 in November, while the PMI manufacturing and construction indicators remained in contractionary territory. Private consumption rose strongly in the third quarter but is expected to moderate at the turn of the year. After weak average growth in the previous quarters, private consumption in the euro area increased by 0.7%, quarter on quarter, in the third quarter (Chart 6), probably boosted by temporary factors such as the Paris 2024 Olympic and Paralympic Games – albeit to a limited extent. The consumption of goods rebounded and increased broadly in line with consumption of services in the third quarter, as also suggested by a 1% rise in retail sales, quarter on quarter, in the third quarter, compared with the more modest rise of 0.2% in services production. However, incoming data suggest that household spending is likely to have moderated in the fourth quarter, as retail sales declined in October. The European Commission’s consumer confidence indicator also fell back towards its September level in November. Nevertheless, more forward-looking indicators point to a recovery in the quarters ahead, as reflected in the latest Eurosystem staff macroeconomic projections.6 The European Commission’s indicators of business expectations for demand in contact-intensive services continued to improve in November, while the ECB’s latest Consumer Expectations Survey also showed that expected holiday purchases remain at a high level, despite some recent softening. Consumer expectations for major purchases in the next 12 months improved further 6 See “Eurosystem staff macroeconomic projections for the euro area, December 2024”, published on the ECB’s website on 12 December 2024.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Economic activity 17 in November, rising above their pre-pandemic levels and indicating an increase in consumer demand for goods. Higher purchasing power and continued rises in real labour income are expected to support consumption in the quarters ahead. At the same time, uncertainty remains elevated and households may continue to have concerns about longer-term geopolitical issues, which could have an adverse impact on their spending decisions (see Box 3). Chart 6 Private consumption and business expectations for retail trade, contact-intensive services and motor vehicles (quarter-on-quarter percentage changes; net percentage balances) Sources: Eurostat, European Commission and ECB calculations. Notes: Business expectations for retail trade (excluding motor vehicles), expected demand for contact-intensive services and expected sales of motor vehicles for the next three months refer to net percentage balances; “contact-intensive services” refers to accommodation, travel and food services. The latest observations are for the third quarter of 2024 for private consumption and November 2024 for business expectations for retail trade, contact-intensive services and motor vehicles. Business investment contracted notably in the third quarter of 2024 and is likely to remain muted in the near term. Having shown modest growth in the first half of the year, non-construction investment, excluding Irish intangible investment, fell by 1.1%, quarter on quarter, in the third quarter. Investment growth in the fourth quarter is set to have continued to contract, as suggested by the PMI output and orders indicators and the European Commission’s confidence surveys for the capital goods sector up to November (Chart 7, panel a). The Commission’s latest survey on factors limiting production in the capital goods sector revealed weak demand and little need for further investment in equipment in the fourth quarter. The elevated uncertainty surrounding geopolitics, trade tariffs and economic policy is further dampening investment (see Box 3). In this environment, bankruptcies have continued to rise, standing about 23% higher than their 2019 levels in the third quarter of 2024. Looking ahead, investment is expected to gradually increase as the impact of tight financing conditions diminishes, demand improves, and green and digital investment plans are implemented.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Economic activity 18 Chart 7 Real investment dynamics and survey data a) Business investment b) Housing investment (quarter-on-quarter percentage changes; diffusion indices and mean-adjusted) (quarter-on-quarter percentage changes; percentage balances and diffusion index) Sources: Eurostat, European Commission (EC), S&P Global Market Intelligence and ECB calculations. Notes: Lines indicate monthly developments, while bars refer to quarterly data (apart from the survey data for factors limiting production, which are also quarterly). The PMIs are expressed in terms of the deviation from 50. In panel a), business investment is measured by non-construction investment excluding Irish intangibles. Short-term indicators refer to the capital goods sector. “Limits to production from demand” is expressed as the average over the period from the first quarter of 1991 to the fourth quarter of 2019 and then inverted. The latest observations are for the third quarter of 2024 for business investment and November 2024 for all other items. In panel b), the line for the European Commission’s activity trend indicator refers to the weighted average of the building and specialised construction sectors’ assessment of the trend in activity compared with the preceding three months, rescaled to have the same standard deviation as the PMI. The line for PMI output refers to housing activity. The latest observations are for the third quarter of 2024 for housing investment and November 2024 for PMI output and the European Commission’s activity trend. Housing investment fell slightly in the third quarter of 2024 and is expected to continue to decline in the short term. Housing investment in the euro area edged down by 0.2% in the third quarter, while production in building and specialised construction fell by 0.6%. Survey-based activity indicators point to further weakening in the fourth quarter of 2024, as both the PMI indicator for housing production and the European Commission’s indicator for building and specialised construction activity in the last three months remained in contractionary territory up to November (Chart 7, panel b). However, housing investment should stabilise in the course of 2025. According to the European Commission’s survey, the short-term intention of households to buy or build a house has improved further in the fourth quarter of 2024. Similarly, the ECB’s Consumer Expectations Survey shows that the proportion of households that consider housing as a good investment has significantly increased in 2024 overall, although it declined slightly in October. This improvement in sentiment is supported by falling mortgage rates and is reflected in a gradual recovery in housing loans, as also shown in the October euro area bank lending survey. Euro area export growth continued to slow in the third quarter of 2024. Total euro area export growth slowed by 1.5%, quarter on quarter, in the third quarter. This deceleration confirms the persisting competitiveness challenges facing euro area exporters, even amid a recovery in global demand. Looking ahead, surveys suggest
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Economic activity 19 that the performance of exports will continue to be subdued in the near term. The latest PMIs for export orders remained well below the no-growth threshold in November for manufacturing and point to increasing weakness in services. At the same time, import growth saw a moderate increase of 0.2% in the third quarter, compared with the previous quarter, on the back of a modest rise in domestic consumption. Overall, net exports made a negative contribution of 0.9 percentage points to GDP in the third quarter. Looking ahead, the euro area economy is expected to continue its gradual recovery over the projection horizon, albeit amid significant uncertainty. Following an estimated GDP increase of 0.7% in 2024, activity growth is expected to strengthen over the next three years. In particular, rising real wages and employment, in a context of robust – albeit softening – labour markets, are expected to support a sustained recovery in consumption. Domestic demand should also be bolstered by easing financing conditions, in line with market expectations for the future path of interest rates. The economic recovery is now expected to be slower than anticipated in the September 2024 projections. Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter. According to the December 2024 projections, the economy is expected to grow by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. The projected recovery rests mainly on rising real incomes – which should allow households to consume more – and firms increasing investment. Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Prices and costs 20 3 Prices and costs Euro area headline inflation increased to 2.3% in November 2024, up from 2.0% in October, primarily reflecting a rise in energy inflation.7 At the same time, underlying inflation is overall developing in line with a sustained return to the 2% medium-term target for headline inflation. The indicator of domestic inflation edged down in October but remains high, reflecting strong wage growth and the fact that the prices of some items are still adjusting to the past inflation surge with a substantial delay. The overall rate of growth in labour costs is moderating, while unit profit growth continues to partially buffer the impact of still elevated labour cost pressures and thereby support the ongoing disinflation. Over the review period, most indicators of longer-term inflation expectations remained broadly stable at around 2%, and market-based measures fell closer to this level. The December 2024 Eurosystem staff macroeconomic projections for the euro area foresee headline inflation averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027 when the expanded EU Emissions Trading System becomes operational.8 Euro area headline inflation, as measured in terms of the Harmonised Index of Consumer Prices (HICP), increased further to 2.3% in November 2024, up from 2.0% in October (Chart 8). This was primarily attributable to the expected increase in energy inflation, which rose to -1.9% in November, up from -4.6% in October, owing mainly to an upward base effect. Food inflation fell slightly to 2.8% in November, down from 2.9% in October, reflecting a lower annual rate of change in unprocessed food prices, while the annual rate of change in processed food prices increased marginally. HICP inflation excluding energy and food (HICPX) stood at 2.7% in November, unchanged from October and September. This was due to a small decline in services inflation (3.9% in November, down from 4.0% in October) being offset by an increase in non-energy industrial goods (NEIG) inflation (0.7% in November, up from 0.5% in October). The annual rate of NEIG inflation remained close to its long-term average of 0.6% before the COVID-19 pandemic, while the more persistent services inflation reflects the impact of still elevated wage pressures in some of its items and the effects of lagged repricing in others. 7 The cut-off date for data included in this issue of the Economic Bulletin was 11 December 2024. This flash estimate from Eurostat was revised down by 0.1 percentage points, to 2.2%, in the release of HICP inflation data for November on 18 December 2024. 8 See “Eurosystem staff macroeconomic projections for the euro area, December 2024”, published on the ECB’s website on 12 December 2024.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Prices and costs 21 Chart 8 Headline inflation and its main components (annual percentage changes; percentage point contributions) Sources: Eurostat and ECB calculations. Notes: “Goods” stands for NEIG inflation. The latest observations are for November 2024 (flash estimate). Most measures of underlying inflation suggest that inflation will settle at around the 2% medium-term target on a sustained basis, and the range of values across them has narrowed (Chart 9). In October 2024 – the latest month for which data are available – the bulk of the indicator values ranged from 2.0% to 2.8%.9 The Persistent and Common Component of Inflation (PCCI), which tends to perform best as a predictor of future headline inflation, was at the bottom of this range, while the Supercore indicator, which comprises HICP items that are sensitive to the business cycle, was unchanged at 2.8%. HICPX inflation excluding travelrelated items, clothing and footwear (HICPXX) also remained unchanged, at 2.6%, whereas the 10% and 30% trimmed means, which remove 5% and 15% of the annual rates of change from each tail of the distribution of HICP items respectively, both increased slightly. While it remained at a persistently high level, the indicator for domestic inflation fell slightly further to 4.2%, down from 4.3% and 4.4% in September and August respectively. This reflects the strong weight of services items such as insurance and rents, for which reactions to general inflationary pressures and the dampening of monetary policy restraint propagate more slowly. 9 For more information, see Lane, P.R., “Underlying inflation: an update”, speech at the Inflation: Drivers and Dynamics Conference 2024 organised by the Federal Reserve Bank of Cleveland and the ECB, Cleveland, 24 October 2024.
ECB Economic Bulletin, Issue 8 / 2024 – Economic, financial and monetary developments Prices and costs 22 Chart 9 Indicators of underlying inflation (annual percentage changes) Sources: Eurostat and ECB calculations. Notes: The grey dashed line represents the ECB’s inflation target of 2% over the medium term. The latest observations are for November 2024 (flash estimate) for HICPX, HICP excluding energy and HICP excluding unprocessed food and energy, and for October 2024 for all other indicators. Pipeline pressures increased in October, although they remained moderate across all industry categories (Chart 10). At the early stages of the pricing chain, producer price inflation for energy, which has been negative since April 2023, edged up to -11.2% in October 2024 from -11.5% in September. The annual growth rate of producer prices for domestic sales of intermediate goods also remained negative, albeit less so than in the previous month (-0.5% in October, up from -0.8% in September). Similarly, the corresponding annual growth rate of import prices for intermediate goods stood at -0.4% in October, up from -0.8% in September. At the later stages of the pricing chain, domestic producer price inflation for non-food consumer goods rose to 1.1% in October, up from 0.9% in September. There was also an increase in both domestic producer price inflation for the manufacturing of food products, which went up to 1.3% in October from 0.9% in September, and import price inflation for the manufacturing of food products, which climbed to 4.9% in October, possibly driven by the recent double-digit growth rates of international food commodity prices. Overall, pipeline pressures increased across all industry categories, albeit from still moderate levels, indicating an end to the easing of the pipeline pressures that had accumulated as a result of earlier cost shocks.
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