15 ECB Presentation Oct 2015.ppt - University of Toronto

THE MACRO-ECONOMICOUTLOOK FOR THE EUROAREA

Bank

ECB-RESTRICTED

Pavlos Karadeloglou

European Central Bank

Deputy HeadConvergence and Competitiveness Division

UN DESA Expert Group Meetingon the World Economy

October 21-23, 2015, New York

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www.ecb.europa.eu ©

Outline

2

The three shocks supporting Euro Area activity1.

Impact of accommodative monetary policy2.

What drives the current pick-up?3.

4. The way forward

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www.ecb.europa.eu ©3




4. The way forward

Outline

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Shock 1: Low oil price: lower inflation / high real disposable income

4

Brent crude oil price developments

Source: Bloomberg. Last observation: September 2015.

40

45

50

55

60

65

70

75

80

85

90

95

100

105

110

115

120

Jan

-14

Feb

-14

Ma

r-14

Ap

r-1

4

Ma

y-1

4

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-14

Jan

-15

Feb

-15

Ma

r-15

Ap

r-1

5

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

OIL (USD)

OIL (EUR)

Oil (USD) since Jun-14 - 57.8%Oil (EUR) since Jun-14 -48.8%

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Shock 2: Improvement in price competitiveness

Decomposition of REER: nominal EER and relative CPI(Rebased August 2012=0, monthly data)

Source: ECB.Note: The last observations refer to September 2015. Relative CPI refers to the euro area CPI relative to the EER-20 groupof trading partners. An increase in EER indicates a worsening in price competitiveness.

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Shock 3: Accommodative monetary policy

ECB interest rates and money market rates(percentages per annum; daily data)

Source: ECB. Last observation: October 6, 2015.

-1

0

1

2

3

4

5

6

Se

p.0

8

Ma

r.0

9

Se

p.0

9

Ma

r.1

0

Se

p.1

0

Ma

r.1

1

Se

p.1

1

Ma

r.1

2

Se

p.1

2

Ma

r.1

3

Se

p.1

3

Ma

r.1

4

Se

p.1

4

Ma

r.1

5

Se

p.1

5

Deposit rate MRO rate Marginal lending rate

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4. The way forward

Outline

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ECB decisions since June 2014

8

• Cut in key ECB interest rates

• Targeted Longer-Term Refinancing Operations (TLTRO) to supportbank lending to households and non-financial corporations

• Purchase of non-financial private sector assetsstarting in October 2014:

ABS purchase program (ABSPP)

Covered bond purchase program

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•ECB decisions since June 2014 II (January 2015)

• Purchase securities issued by euro area governments andagencies and European institutions in the secondary market

• Amount of purchases: €60 billion/month, intended to be carriedout until end-September 2016, or beyond, if necessary.

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Impact of accommodative monetary policy I

10

• Market participants now expect EONIA to remain in the negative territory until September2018. This reflects expectations of higher future excess liquidity as a result of the APP purchases.

EONIA rate

(percentages per annum; daily data)


-1

0

1

2

3

4

5

Sep

.08

Mar.09

Sep

.09

Mar.10

Sep

.10

Mar.11

Sep

.11

Mar.12

Sep

.12

Mar.13

Sep

.13

Mar.14

Sep

.14

Mar.15

Sep

.15

EONIA

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Impact of accommodative monetary policy II

II

11

• Bond yields in the euro area reached low levels.

10 –year government bond yields


0

1

2

3

4

5

6

7

Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15

BE FR AT NL FI DE


0

5

10

15

20

25

30

35

40

Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15

PT IE GR ES IT% %

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Impact of accommodative monetary policy III

III

12

• The decline in market-based measures of inflation expectations stoppedand expectations recovered.

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Impact of accommodative monetary policy IV

13

• There has been a continued strong performance in equity markets acrossEurope.

Equity market developments since APP announcement(index, daily data)


1700

1750

1800

1850

1900

1950

2000

2050

2100

2150

2200

300305310315320325330335340345350355360365370375380385390395400

01-J

an-2

015

11-J

an-2

015

21-J

an-2

015

31-J

an-2

015

10-F

eb-2

015

20-F

eb-2

015

02-M

ar-2

015

12-M

ar-2

015

22-M

ar-2

015

01-A

pr-2

015

11-A

pr-2

015

21-A

pr-2

015

01-M

ay-2

015

11-M

ay-2

015

21-M

ay-2

015

31-M

ay-2

015

10-J

un-2

015

20-J

un-2

015

30-J

un-2

015

10-J

ul-2

015

20-J

ul-2

015

30-J

ul-2

015

09-A

ug-2

015

19-A

ug-2

015

29-A

ug-2

015

08-S

ep-2

015

18-S

ep-2

015

28-S

ep-2

015

Euro Stoxx (left axis)

S&P 500 (right axis)

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Impact of accommodative monetary policy V

V

14

• Lending to euro zone households and firms rose for the first time in three yearsin March and continued its upward trend

Non-MFI excluding general government sector loans dynamics

(annual growth rate)

Source: ECB. Last observation: August, 2015.

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

3/31

/201

2

6/30

/201

2

9/30

/201

2

12/3

1/20

12

3/31

/201

3

6/30

/201

3

9/30

/201

3

12/3

1/20

13

3/31

/201

4

6/30

/201

4

9/30

/201

4

12/3

1/20

14

3/31

/201

5

6/30

/201

5

Loans

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4. The way forward

Outline

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In line with our expectations, the recovery is re-gaining momentum.

16

(quaerterly percentage changes, index and percentage balance)

Source: Markit, DG-ECFIN, Eurostat and ECB Staff calculations. Last observation September 2015.

Composite PMI, Economic sentiment and consumer confidence.

-0.5

-0.3

-0.1

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5

45

47

49

51

53

55

57

59

61

63

65

2010Q1

Q2 Q3 Q4 2011Q1

Q2 Q3 Q4 2012Q1

Q2 Q3 Q4 2013Q1

Q2 Q3 Q4 2014Q1

Q2 Q3 Q4 2015Q1

Q2 Q3

Real GDP (rhs) September 2015 MPE (rhs) ESI (lhs) Composite PMI (lhs)

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It is mainly consumption based

17

EA Private consumption(annual percentage changes)

Source: Eurostat and ECB Staff

calculations. Last observation: Q2 2015.

-3

-1

1

3

2010 2011 2012 2013 2014 2015

Total private consumption Real disposable income

EA durable and non-durable consumption(annual percentage changes)

Source: Eurostat and ECB Staff calculations. Last

observation: Q2 2015.

-6

-4

-2

0

2

4

6

2010 2011 2012 2013 2014 2015

Durables Non-durables and services

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Sources: Eurostat and ECB calculations.Note: The horizontal lines refer to the respective pre-crisis averages. Last data: 2015Q2 for income and other factors, 2015Q3for energy.

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Euro area headline inflation and inflation excluding food and energy(annual growth rates)

Sources: Eurostat and September 2015 ECB staff macroeconomic projections.Latest observation: September 2015 (Flash estimate).

Recent HICP developments ECB-SECRET

19

Projections

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The recovery is historically slow, but gaining momentum

Sources: Eurostat, AWM database and ECB calculations.Notes: Q refers to the troughs as defined by the CEPR Euro Area Business Cycle Dating Committee.

Euro area recoveries(index: trough = 100)

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4. The way forward

Outline

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Where do we stand, where should we go?

22

• The pick-up in recovery is partly triggered by exogenous factors (Oilprices, weaker euro and accommodative monetary policy)…

• …rather than endogenous factors that could underpin a self-sustainedrecovery

• We still have low investment, high unemployment, low potential growthand negative external risks (slowdown in EMEs, influx of refugees)

• What happens in the long run?

• High unemployment to be reduced needs higher potential growth.

• Main objective: structural reforms to increase total factor productivity

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In FR, wage-productivity links are weak

Source: Authors calculations based on CompNet database

Note: The graphs show the evolution of the median labour compensations per worker among the least productive firms (firms at the bottom of the labourproductivity distribution) and most productive firms (firms at the top of the labour productivity distribution)

Median labour compensation perworker (2003=1)

Median labour compensation per worker(2003=1)

•In FR, compensation per employee for both leastand most productive firms grew at the same rate

•…In DE, we observe• instead wage dispersion

23

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Source: Authors calculations based on CompNet 20E database

Median labour compensations per employee andlabour productivity (2003=1)

Median labour compensation, minimum wagegrowth, and CPI (2003=1)

In FR, wages and productivity links are weak

•…This affects the competitiveness of theFrench economy

24

•Minimum wages and rigidity in bargainingprocess may be distortionary

• Negotiated wage increases are correlated withminimum wage increases (Avouyi-Dovi et al, 2013)

• Minimum wage indexation (based on past inflation)mechanism may be distortionary when times are notstable.

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Micro and small firms backbone of Italy’s productive system

… generating more than 60% of total employment

Size matter for productivity

Source: COMPNET. Manufacturing sector

25

More than 95% of productivestructure of the country …

Source: Criscuolo, Gal, Menon (2014)

Share of firms of differentsize by country

Size classes*1: 1-9 employees*2: 10-19 employees*3: 20-49 employees*4: 50-249 employees*5: ≥ 250 employees

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Most new firms are born small, but in Italy they do not grow

26

Source: Criscuolo, Gal, Menon (2014)Sector coverage: manufacturing, construction, and non financial business services.

Average size of start-up and old firms across industries and across countries

Manufacturing Services

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When French firms reach the 50 employee threshold, they need to:

1. set up a “works council” with minimum budget of 0.3% of total payroll

2. establish a committee on health, safety and working conditions

3. appoint a union representative (i.e. not simply a local representative of the firm’s workers) ifwanted by workers

4. establish a profit sharing plan

5. incur higher liability in case of a workplace accident

6. report monthly and in detail all labor contracts to the government

7. undertake a formal “Professional assessment” for each worker older than 45.

8.Firing costs increase substantially in the case of collective dismissals of 10 or more workers(implicit tax on firm size which makes firms reluctant to hire)

• The burden of French labor legislation increases when firms employ 50 workers

27

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Reserve slides

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It is mainly consumption based.

Consumer confidence indicator

Source: EC. Last observation: September 2015.

-55

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

EA DE FR IT ES

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Euro’s appreciating trend is reversed

30

EURUSD real exchange rate and EUR real effectiveexchange rate(CPI-deflated; monthly data)

Source: ECB.Note: The latest observation refers to September 2015. NEER-38 and EURUSD are indices (1999Q1=100).

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Deviations from the 1980-2015 average, CPI-deflatedbilateral and effective rates(monthly data)

Source: ECB, BIS.Note: Last observation refers to September 2015 for EER-12 and EER-38 and all bilateral exchange rates andAugust 2015 for USD, JPY, GBP and CHF of the effective exchange rates. For EER-38 data was only available from1993. A negative number indicates a depreciation.

Based on EER-39, euro close to its long term average value

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The euro area has partially regained price competitiveness

Real effective exchange rate(Indexed to the 1995-2013 average, quarterly data)

Source: ECB.Note: Last observation June 2015. For CPI, ULCT and GDP the EER-19 and for ULCM the EER-18 is the group of tradingpartners. An increase indicates a worsening in price competitiveness.

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Source: Garicano et al, 2013.

•The size distribution is distorted - “too many” firms just below the 50 employee-size-threshold and “too few” firms just above it

•Size related regulations may explain this distortion

The size distribution in FR has a discrete jump at around 50 employees

33

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When French firms reach the 50 employee threshold, they need to:

1. set up a “works council” with minimum budget of 0.3% of total payroll

2. establish a committee on health, safety and working conditions

3. appoint a union representative (i.e. not simply a local representative of the firm’s workers) ifwanted by workers

4. establish a profit sharing plan

5. incur higher liability in case of a workplace accident

6. report monthly and in detail all labor contracts to the government

7. undertake a formal “Professional assessment” for each worker older than 45.

8.Firing costs increase substantially in the case of collective dismissals of 10 or more workers(implicit tax on firm size which makes firms reluctant to hire)

• The burden of French labor legislation increases when firms employ 50 workers

34

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FR-Q3: Why did France lose price competitiveness?

Wage developments have not been in line with productivitydevelopments.

Industry level bargaining system and the minimum wageindexation mechanism can lead to a discrepancy betweenproductivity and wage developments, particularly in unstable times.

35

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0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1share of exporters

100

90

80

70

60

50

40

30

20

10

average 2001-2012

share of exporters by deciles of tfp

Exporting firms tend to be concentrated among the most productive and largest firms

Size classes*1: 1-9 employees*2: 10-19 employees*3: 20-49 employees*4: 50-249 employees*5: ≥ 250 employees

Source: COMPNETNote: manufacturing sector Unless otherwise indicated, the sample includes all firms with at least one employee.

36

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Why firms do not grow? Ownership structure vs. policy features

• Entrepreneurship model:

Family ownership (Michelacci-Schivardi, 2008; Pellegrino-Zingales2014; Bugamelli et al. 2014)

• Size-contingent regulations may distort the firm size distribution (Garicano etal. 2013; Guner et al. 2008):

Labour regulation:

o (EPL – threshold at 15 employees?)

o Difficult for firms to reorganise in order to exploit newtechnologies?

Fiscal regime and accounting requirements

Access to finance venture capital

37

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Unemployment remains high but is improving

Source: Eurostat.Latest data: August 2015.

38

Euro area unemployment(% of labour force)

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Aim:

•Address persistent weakness in bank lending and hence restore monetary policytransmission

•Provide long-term funding at attractive terms and conditions

Main Features:

•8 operations until 2016

•Initial allowance: 7% of MFI’s outstanding amount of loans to euro area non-financial private sector (households and non-financial corporations excluding loansfor house purchase) in 2 operations (18/09/14 and 11/12/14)

•Additional allowance: net lending in excess of benchmark, with a multiplier of 3

•Fixed rate: prevailing MRO at the time of the tender announcement + 10 bps

•Same set of collateral as regular operations

•Forced repayments if lending up to 30 April 2016 is below the benchmark, to payback in September 2016

•All TLTROs will mature in September 2018, i.e. in around 4 years.

June – September ECB decisions: Targeted LTROs

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• Take-up EUR 82.6 bn within range ofstaff estimates. Market expectationsunduly high.

• 40% of initial allowance of EUR 206.7 bn

• EUR 49 bn net liquidity injection

• 225 bidders representing 738 creditinstitutions out of 382 eligible biddersrepresenting 1,372 credit institutions

• 55% of allotment to institutions that donot take recurrent recourse to ECBoperations

40

June – September ECB Decisions: results of first Targeted LTRO

3746

80

173

25

50

75

100

125

150

175

200

25

50

75

100

125

150

175

200

Recurrent Non-recurrent

Bid amount Number of bidders

Bid amount and number of bidders byrecurrent vs. non-recurrent bidders

(bid amount in € billion)

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• ABS purchase programme (ABSPP) - broad portfolio of simple and transparentasset-backed securities with underlying assets consisting of claims against the euroarea non-financial private sector: to strengthen direct pass-through effect

• Portfolio rebalancing channel

• Underpins Forward Guidance

• Covered bond purchase programme (CBPP3): Broad portfolio of euro-denominatedcovered bonds issued by MFIs domiciled in the euro area.

will further complement the TLTROs and ABSPP

further support to lending (tight link between covered bonds and loans that backthem)

banks to respond by originating more covered bonds – hence more loans tocollateralise them

June – September ECB decisions: Private Asset Purchase Programmes

Private asset purchase programmes to empower TLTRO

credit easing impact

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“The newly decided measures, together with the [TLTROs], will have a

sizeable impact on our balance sheet.” “The [ … ] aim is to steer,

significantly steer, the size of our balance sheet towards the dimensions

it used to have at the beginning of 2012.”

42

June – September ECB decisions: impact on balance sheet

• (Size of) balance sheet not

an aim in itself

• Instrumental in reducing

uncertainty around

effectiveness of measures:

Transmission potential

per extra euro of

liquidity created

Overall amount of

liquidity created

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…but divergences at a country level

43

Developments in HCIs(ULCT-based, including intra- and extra-trade; percent change between 1999Q1 and 2015Q2)

Source: ECB.Note: For single countries the REER-19 plus the Euro area is the group of trading partners, For the Euro area the REER-19is used. A negative value indicates an increase in price or cost competitiveness. Latest observation 2015Q2.

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15 ECB Presentation Oct 2015.ppt - University of Toronto