Economic, financial and monetary developments

Summary

At its meeting on 17 October 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 incoming information on inflation showed that the disinflationary process is well on track. The inflation outlook was also affected by recent downside surprises in indicators of economic activity. Meanwhile, financing conditions remained restrictive.

Inflation is expected to rise in the coming months, before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its 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.

Economic activity

The incoming information suggests that economic activity has been somewhat weaker than expected. While industrial production has been particularly volatile over the summer months, surveys indicate that manufacturing has continued to contract. For services, surveys show an uptick in August, likely supported by a strong summer tourism season, but the latest data point to more sluggish growth. Businesses are expanding their investment only slowly, while housing investment is continuing to fall. Exports have weakened, especially for goods.

Although incomes rose in the second quarter, households consumed less, contrary to expectations.^[1] The saving rate stood at 15.7% in the second quarter, well above the pre-pandemic average of 12.9%. At the same time, recent survey evidence points to a gradual recovery in household spending.

The labour market remains resilient. The unemployment rate stayed at its historical low of 6.4% in August. However, surveys point to slowing employment growth and a further moderation in the demand for labour.

The Governing Council expects the economy to strengthen over time, as rising real incomes allow households to consume more. The gradually fading effects of restrictive monetary policy should support consumption and investment. Exports should contribute to the recovery as global demand rises.

Fiscal and structural policies should be aimed at making the economy more productive, competitive and resilient. That would help to raise potential growth and reduce price pressures in the medium term. To this end, 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. Implementing the EU’s revised economic governance framework fully, transparently and without delay will help governments bring down budget deficits and debt ratios on a sustained basis. Governments should now make a strong start in this direction in their medium-term plans for fiscal and structural policies.

Inflation

Annual inflation fell further to 1.7% in September, its lowest level since April 2021. Energy prices dropped sharply, at an annual rate of -6.1%. Food price inflation went up slightly, to 2.4%. Goods inflation remained subdued, at 0.4%, while services inflation edged down to 3.9%.

Most measures of underlying inflation either declined or were unchanged. Domestic inflation is still elevated, as wage pressures in the euro area remain strong. Negotiated wage growth will remain high and volatile for the rest of the year, given the significant role of one-off payments and the staggered nature of wage adjustments.

Inflation is expected to rise in the coming months, partly because previous sharp falls in energy prices will drop out of the annual rates. Inflation should then decline to target in the course of next year. The disinflation process should be supported by easing labour cost pressures and the past monetary policy tightening gradually feeding through to consumer prices. Most measures of longer-term inflation expectations stand at around 2%.

Risk assessment

The risks to economic growth remain tilted to the downside. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by sources of geopolitical risk, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, which could also disrupt energy supplies and global trade. Lower demand for euro area exports due, for instance, to a weaker world economy or an escalation in trade tensions between major economies would further weigh on euro area growth. Growth could also be lower if the lagged effects of monetary policy tightening turn out stronger than expected. Growth could be higher if the world economy grows more strongly than expected or if easier financing conditions and declining inflation lead to a faster rebound in consumption and investment.

Inflation could turn out higher than anticipated 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 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, monetary policy dampens demand more than expected, or the economic environment in the rest of the world worsens unexpectedly.

Financial and monetary conditions

Shorter-term market interest rates have declined since the Governing Council meeting on 12 September, owing mainly to weaker news on the euro area economy and the further fall in inflation. While financing conditions remain restrictive, the average interest rates on new loans to firms and on new mortgages decreased slightly in August, to 5.0% and 3.7% respectively.

Credit standards for business loans were unchanged in the third quarter, as reported in the October 2024 bank lending survey, after more than two years of progressive tightening. Moreover, demand for loans by firms rose for the first time in two years. Overall lending to firms continues to be subdued, growing at an annual rate of 0.8% in August.

Credit standards for mortgages eased for the third quarter in a row, owing especially to greater competition among banks. Lower interest rates and better housing market prospects led to a strong increase in the demand for mortgages. In line with this, mortgage lending picked up slightly, growing at an annual rate of 0.6%.

Monetary policy decisions

The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility were lowered to 3.25%, 3.40% and 3.65% respectively, with effect from 23 October 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.

The Eurosystem no longer reinvests all of the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP), reducing the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.

Conclusion

At its meeting on 17 October 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 returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. 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.

In any case, the Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its medium-term target and to preserve the smooth functioning of monetary policy transmission.

1 External environment

Global economic activity has remained steady, albeit uneven across sectors. Survey data point to differing levels of activity across the services and manufacturing sectors. Manufacturing saw lower demand as a result of the frontloading of orders earlier in the year. This slowdown in manufacturing demand has also weighed on goods trading, which in turn contributed to a further normalisation of shipping costs. Inflation continues to moderate, yet pressures on services prices remain.

Global economic activity has remained steady, albeit uneven across sectors. The global (excluding the euro area) composite output Purchasing Managers’ Index (PMI) remained in expansionary territory in September 2024 at 52.5, down from 53.2 in August (Chart 1). However, the differences across sectors increased markedly, with the services component continuing to indicate expansion in the third quarter, despite a slight decline, and the manufacturing index weakening further to 50.5 in the third quarter, well below its second-quarter average of 52.9. The decline in the PMI indicator for manufacturing output was broad-based across regions, but was particularly evident in China and the United States. Survey data are consistent with hard data, which show that global industrial production contracted by 0.2% month on month in July, reflecting declines in industrial production in advanced economies and in durable goods at the global level. The weakness in the global manufacturing cycle appears to have been driven by the reversal of a build-up of inventories in the first half of 2024. Overall, ECB nowcasting models point to steady quarter-on-quarter growth of around 0.9% in the third quarter.

Chart 1

Global output PMI

(diffusion indices)

The shift in demand for manufactured goods was reflected in weaker trade data. In the first half of the year, global trade growth was supported by strong demand for imported goods brought forward amid concerns about disruptions to shipping routes in the Red Sea and possible delays ahead of the end-of-year holiday season. In the second half of this year, import demand is set to weaken again as the earlier frontloading of import orders fades out, as also indicated by survey data. The global (excluding the euro area) PMI for new export orders in manufacturing fell into contractionary territory in the third quarter of 2024 at 49.0, the lowest value observed since the fourth quarter of 2023. Nonetheless, steady global economic activity overall should provide sources of trade growth in the third and fourth quarters of the year. With trade in manufactured goods slowing somewhat, shipping costs continued to fall from their previous peaks. The increases in shipping costs observed in the second quarter of 2024 reflected higher demand consistent with the frontloading of imports at the start of the year. Now that this phenomenon is reversing and demand has slowed, shipping costs are beginning to normalise.

Inflation across OECD economies continues to moderate, yet underlying price pressures remain. In August the annual headline rate of consumer price index (CPI) inflation across OECD countries (excluding Türkiye) declined to 2.7%, compared with 3.0% in the previous month (Chart 2). Excluding food and energy prices, OECD core inflation remained unchanged in August at 3.2%. The decline in headline inflation was due in large part to lower energy inflation, while food prices remained broadly stable. Underlying price pressures are sustained in particular by services inflation, which tends to lag headline inflation more than other measures such as the energy, food and goods categories.^[2] Services inflation in turn is closely linked to wage growth. With wage growth expected to ease in 2025 in the context of cooling labour markets, headline inflation is expected to further normalise.

Chart 2

OECD CPI inflation

(year-on-year percentage changes)

Brent crude oil prices have risen by 3.0% since the September Governing Council meeting in the wake of recent geopolitical tensions and a first interest rate cut by the Federal Reserve.^[3] The main drivers of higher oil prices were the heightened tensions in the Middle East following Iran’s missile attack on Israel on 1 October 2024 and the improved sentiment for the growth outlook following the rate cut by the Federal Reserve. These factors came in tandem with the existing support for oil prices stemming from the earlier decision taken by OPEC+ to delay oil production hikes. Nonetheless, concerns about an economic slowdown in China have partially mitigated the upward pressure on oil prices. European gas prices have risen by 6.9% since the September Governing Council meeting. This increase has been driven by investors’ concerns over the impending expiration of the gas transit agreement between Ukraine and Russia at the end of the year, with the Ukrainian government reluctant to renew the arrangement. Escalating tensions in the Middle East and predictions of colder than average temperatures have further fuelled the increase in gas prices. The concerns over supply disruptions are likely to continue until new LNG capacity comes online, which is not expected before the second half of 2025. Metals prices have increased by 7.9%, influenced in part by the Federal Reserve’s interest rate cut. Meanwhile, food prices have risen by 3.8%, driven primarily by droughts in Brazil.

In the United States, economic activity is moderating but continues to grow at a solid pace. In the second quarter of 2024, real GDP continued to grow at a robust pace of 0.7% quarter on quarter. Inventories and strong consumer spending carried on boosting activity despite moderating considerably since the second half of 2023. The US labour market continues to cool but remains healthy overall, with non-farm job gains averaging 116,000 per month over the past three months, down from a monthly average of 202,000 in 2023. The unemployment rate eased to 4.1% in September, from 4.2% in August, but has risen overall in 2024 from 3.7% at the start of the year. Meanwhile, the vacancy-to-unemployed ratio has also now declined to pre-pandemic levels. Wage growth moderated to 3.9% year on year in the second quarter of 2024, albeit remaining above the range of 3-3.5% which the Federal Reserve considers to be consistent with its inflation target. Headline CPI inflation fell to 2.4% in September, while core inflation rose marginally to 3.3% from 3.2% in August. Shelter inflation remains persistent, but is expected to further normalise over the next few months. The Federal Open Market Committee (FOMC) decided to cut the federal funds rate by 50 basis points at its September meeting, citing progress on inflation and balanced risks to its employment and inflation goals. In the September FOMC projections, the median forecast for the federal funds rate was revised down by 75 basis points in 2024-25 and 25 basis points in 2026, as compared with the June projections.

Chinese economic growth momentum remains weak. Over recent months, subdued consumer sentiment amplified the slowing of retail sales, particularly in the automotive sector. Infrastructure investment slowed markedly owing to greater financial constraints at the local government levels. At the same time, the real estate market remains a significant drag on overall activity. While there are early signs of stabilisation in new home sales, housing starts and property development funds, prices for new and existing homes continue to decline, and unsold housing inventory remains high. The People’s Bank of China responded in September by introducing the most significant stimulus package since the pandemic. This includes a reduction of 20 basis points in the key (seven-day repo) policy rate to 1.5%, a 50 basis point cut in the reserve requirement ratio, an expanded re-lending programme and a 50 basis point cut on rates for existing mortgages. The impact of this package is, however, uncertain, as it may not fully address the underlying issues such as weak income expectations and home completion concerns. In October the Ministry of Finance announced plans for an additional fiscal stimulus aimed at supporting household consumption and stabilising the real estate market, although the details remain unclear at this stage. Overall, policymakers are signalling serious concerns about a slowing economy and an increased likelihood of missing the 5% growth rate target for 2024.

Activity in the United Kingdom slowed, while core inflation edged up on base effects. In July the UK economy recorded a second consecutive month of zero GDP growth, which, if unadjusted, implies a quarterly growth rate for the third quarter of 2024 of only 0.1%. Consequently, the Bank of England revised down its growth forecast for the third quarter to 0.3%. Despite weak data for the month of July, indicators including the composite PMI and business confidence remain positive, supported by strong retail sales and rising real wages. However, consumer confidence declined in September. The Government will present its budget plan in October, which is widely expected to increase fiscal headwinds. Growth is forecast to be modest in the second half of 2024 on account of tight fiscal and monetary policies. Headline inflation remained at 2.2% in August, while core inflation rose to 3.6%, driven by services inflation. At its September meeting, the Bank of England kept its policy rate at 5.0% and opted to keep the pace of its quantitative tightening unchanged, continuing to reduce bond holdings by GBP 100 billion over the next year, primarily through asset runoff.

2 Economic activity

Euro area real GDP grew at a modest pace in the first half of 2024, after broadly stagnating throughout 2023. However, activity is likely to have been somewhat weaker than expected in the third quarter of the year. Across sectors, incoming data point to the continuing weakness of manufacturing activity, reflecting low demand for goods, competitiveness losses and rising regulatory costs. Services activity, supported by a strong summer tourism season, continues to expand, but the latest data point to slower growth. Across demand components, business investment remains subdued, against a background of high uncertainty and the lingering effects of the past monetary policy tightening. Housing investment continues to fall. Although incomes rose in the second quarter, households consumed less, contrary to expectations. However, recent survey evidence points to a gradual recovery in household spending.^[4] Looking ahead, the economy is expected to strengthen over time, as rising real incomes allow households to consume more. The gradually fading effects of restrictive monetary policy should support consumption and investment, and exports should contribute to the recovery as global demand rises.

The euro area economy grew at a modest pace in the first half of 2024, after broadly stagnating in previous quarters (Chart 3). Real GDP growth was 0.3%, quarter on quarter, in the first quarter of 2024, and moderated to 0.2% in the second quarter as a result of the slowdown in private domestic demand. Services continued to drive this modest expansion, while manufacturing activity remained weak. Moreover, growth dynamics in the second quarter were uneven among the largest euro area economies: GDP increased by 1.0% in the Netherlands, by 0.8% in Spain and by 0.2% in France and Italy, while it shrank by 0.1% in Germany.

Available data suggest that the economy weakened again towards the end of the third quarter of 2024. The composite output Purchasing Managers’ Index (PMI) fell in September, bringing the average indicator for the third quarter down to the 50-point threshold, which suggests that the euro area economy is broadly stagnating.

Chart 3

Euro area real GDP, composite output PMI and ESI

(left-hand scale: quarter-on-quarter percentage changes; right-hand scale: diffusion index)

The subdued growth of the economy reflects a continuation of the downward trend in manufacturing activity, with the euro area PMI for manufacturing output in contractionary territory since April 2023 (Chart 4, panel a). Industrial production (excluding construction) was particularly volatile over the summer months. It increased by 0.3% on average over July and August, compared with the second quarter of 2024, but remains at a low level. Looking ahead, the PMIs for new orders and future manufacturing activity fell further in September, signalling the ongoing deterioration of operating conditions in the sector. The European Commission’s Economic Sentiment Indicator (ESI) also showed a pronounced drop in industrial business confidence in September. While supply-side constraints have eased, weak demand has become the main headwind for European manufacturers. This was confirmed by feedback from the ECB’s corporate contacts in September, who also stressed their increasing concerns about the green transition, competitiveness and global political uncertainty (see Box 4). These factors were reported to be holding back investment and confidence.

Services sector activity continued to expand – albeit at a slower pace. Following the temporary boost from the Paris 2024 Olympics in August, the decline in the PMI for services activity resumed in September (Chart 4, panel b), suggesting a modest average expansion during the third quarter (52.1). This is consistent with the still strong dynamics in contact-intensive services, as reported by corporate contacts, reflecting robust consumer demand for tourism services, while other services have been more affected by the elevated uncertainty. In September, the ESI for the services sector remained resilient, and although the PMI for business expectations for services activity over the coming 12 months has been marking a downward trend since May, it stayed well above 50.

Chart 4

PMIs across sectors of the economy

a) Manufacturing	b) Services
(diffusion indices)	(diffusion indices)

The unemployment rate remains low, while signs of a slowdown in the labour market are emerging. The unemployment rate stood at 6.4% in August, unchanged from July – its lowest level since the euro was introduced (Chart 5). Nonetheless, signs of cooling in the labour market continue to emerge. Growth in the labour force, which has been a key driver of employment growth in the post-pandemic period, continued to moderate as the implicit labour force remained constant between July and August.^[5] At the same time, labour demand is softening. The rate of job postings from the online job listings website Indeed, a measure of the share of unfilled job openings in the euro area, continued to fall in August, reaching its lowest level since September 2021.^[6]

Short-term indicators suggest that the labour market will continue to cool in the third quarter. The monthly composite PMI employment indicator declined from 49.9 in August to 49.7 in September, remaining around the neutral threshold of 50 points in the third quarter of 2024 (Chart 5). The deteriorating perceptions of employment growth have been driven by the manufacturing sector, which fell further into contractionary territory in September. The PMI for employment in the services sector was still in expansionary territory at 51.0 but remains well below the levels recorded earlier in the year. The evidence of a muted outlook for employment furnished by the PMIs is consistent with the findings from the ECB’s recent contacts with non-financial companies (see Box 4). Overall, weaker employment dynamics should support a gradual recovery in labour productivity going forward.

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)

Real private consumption remained weak in the second quarter of 2024, but surveys suggest a strengthening of household spending dynamics in the near term. Although incomes rose in the second quarter, households consumed less, contrary to expectations. The household saving ratio increased to 15.7%, amid still subdued consumer confidence, elevated uncertainty, restrictive financing conditions and weak borrowing. The weak consumption in the second quarter reflected a drop in non-durable goods (Chart 6, panel a), largely food and energy products, which were the most affected by the inflation surge in 2022-23. The further moderation of food and energy inflation in the third quarter of 2024, coupled with the gradual adjustment of households’ spending to their increasing purchasing power, suggests that the consumption of goods likely improved during the summer months. This is also implied by a small increase in retail trade in August. While expectations across sectors remained moderate in September, surveys suggest that growth in household spending is strengthening. The European Commission’s consumer confidence indicator, while still subdued – mainly owing to weak expectations for the economy –, continued its upward trend in September (Chart 6, panel b). Business expectations for demand in contact-intensive services in the next three months declined but remained elevated from a historical perspective. At the same time, retail trade expectations for the next three months continued to improve, drawing closer to their pre-pandemic average. Finally, consumer expectations for major purchases in the next 12 months moderated in September but remained in line with their pre-pandemic average.

Chart 6

Real private consumption, consumer confidence and expectations

a) Real private consumption and its components

(indices: Q4 2019 = 100)

b) Consumer confidence and expectations

(standardised percentage balances)

Growth in business investment was moderate in the second quarter of 2024 and is expected to slow in the near term. After increasing by 0.7%, quarter on quarter, in the second quarter of 2024, business investment growth (excluding volatile Irish intangibles) is likely to have been muted in the third quarter of 2024, according to short-term indicators for the capital goods sector (Chart 7, panel a). PMI output and the European Commission’s confidence indicator for the sector up to September have broadly levelled off in recent months and PMI new orders have edged down. Investment dynamics have differed across investment categories since the start of the monetary policy tightening cycle at the end of 2021. Overall, cumulated investment in machinery and equipment contracted in this period, while intangibles have continued to grow. Findings from the ECB’s dialogue with non-financial companies in September point to rising uncertainty surrounding the green transition and competitiveness concerns that are causing new investment in machinery and equipment to stall. Corporate contacts also reported weaker foreign and domestic demand than they did three months ago, in a context of elevated (geo)political and regulatory uncertainty, in addition to high energy and wage costs, which are weighing on investment (see Box 4). Yet firms also reported some support for demand in general from expected lower inflation and interest rates, which should ultimately underpin investment. Overall, lacklustre demand growth, coupled with the incomplete absorption of Next Generation EU funds and the slow implementation of both green and digital investment plans, could delay the expected gradual acceleration in business investment.

Chart 7

Real private investment dynamics and survey data

a) Business investment	b) Housing investment
(quarter-on-quarter percentage changes; diffusion indices and percentage balances)	(quarter-on-quarter percentage changes; diffusion index and percentage balances)

Housing investment fell in the second quarter of 2024 and most likely also in the third quarter (Chart 7, panel b). Housing investment declined by 1.3%, quarter on quarter, in the second quarter, as the unwinding of the favourable one-off effects of the mild weather in Germany and of the large fiscal incentives in Italy exacerbated the negative momentum in housing demand. Moreover, residential building permits remained at historically low levels in the second quarter, suggesting that there were limited pressures from projects in the pipeline. Survey-based activity measures, such as the PMI for residential construction output and the European Commission’s indicator for building and specialised construction activity in the last three months, remained subdued up to September. Overall, these developments suggest that housing investment is likely to have declined in the third quarter. Looking ahead, recent ECB surveys point to a moderation in the pace of decline in the coming quarters. In the August Consumer Expectations Survey, household expectations for the housing market improved markedly, as reflected by the increased attractiveness of housing as a good investment. In September, the ECB’s corporate contacts in the construction sector reported ongoing depressed activity but expected a recovery during 2025. The October bank lending survey indicates that dynamics in credit standards and demand for housing loans are expected to continue to improve (see Section 5, “Financing conditions and credit developments”).

Euro area exports contracted in July 2024, despite the growth in global imports. Manufacturing export orders continued to drop sharply in September, while the services sector also entered contractionary territory. The slowdown in export growth reflects the continuation of a broader trend of declining euro area market shares, amid persistent competitiveness issues for euro area manufacturers and increasing competition from China. Meanwhile, imports contracted by 1.1% in July in three-month-on-three-month terms, against a backdrop of sluggish domestic consumption.

Overall, euro area activity is expected to strengthen over time. The economic outlook remains shrouded in uncertainty, with geopolitics and trade tensions representing downside risks. Nevertheless, the factors supporting a medium-term recovery are still in place: real incomes are rising, the labour market – even if softening – remains resilient, and the impact of the past monetary policy tightening is expected to diminish, bolstering consumption and investment going forward. Exports should also contribute to the recovery as global demand rises.

3 Prices and costs

Euro area headline inflation dropped to 1.7% in September 2024, the lowest level since April 2021. Most of the drop from 2.2% in August was due to lower energy prices, although inflation excluding energy and food also declined somewhat to 2.7% in September. Indicators of underlying inflation have fallen recently or moved sideways. The domestic inflation indicator remains high, as wages are still rising at an elevated pace. However, labour cost pressures have eased overall and are expected to continue declining gradually, with profits partially buffering their impact on inflation. Measures of longer-term inflation expectations were broadly unchanged at around 2%, while measures of shorter-term inflation expectations have decreased.

Euro area headline inflation, as measured in terms of the Harmonised Index of Consumer Prices (HICP), declined to 1.7% in September from 2.2% in August (Chart 8). The decrease was mainly driven by lower energy inflation and, to a smaller extent, by a moderation in HICP excluding energy and food (HICPX). Although headline inflation is still expected to increase again somewhat until the end of the year owing to upward energy base effects, the latest spot and futures prices for energy commodities imply a short-term outlook for headline inflation that is lower than expected in the September 2024 ECB staff macroeconomic projections for the euro area.

Chart 8

Headline inflation and its main components

(annual percentage changes; percentage point contributions)

Energy inflation decreased substantially from -3.0% in August to -6.1% in September. The decrease was mainly driven by lower rates of change for fuel and electricity prices, whereas the year-on-year growth rate for gas prices increased. The lower rates of change for energy inflation reflect a downward base effect that owes to a significant increase in energy prices in September 2023 as well as a recent drop in crude oil prices and a sharp decline in refining margins for petrol.

Food inflation was slightly stronger, increasing to 2.4% in September from 2.3% in August. The increase was due to a higher rate of unprocessed food inflation (1.6% in September compared with 1.1% in August), while processed food inflation decreased slightly to 2.6% in September from 2.7% in August. The increase in the annual rate of unprocessed food inflation was related to a stronger than usual month-on-month rise in unprocessed food prices, particularly for fruit, which may partly reflect some unfavourable weather effects.

HICPX inflation declined slightly to 2.7% in September, from 2.8% in August. This reflects a slightly lower rate of services inflation, which stood at 3.9% in September after 4.1% in August. Services inflation has hovered around 4.0% since November 2023, but the latest month-on-month developments point to moderating dynamics. The decline was mainly driven by a lower annual rate for transport services, communications services and restaurant prices. Non-energy industrial goods (NEIG) inflation was unchanged at 0.4% in September, having come down from 0.7% in July. The September developments in NEIG inflation reflect the broadly unchanged annual inflation rate for all main components, with durable goods recording the lowest rate.

Indicators of underlying inflation have moved sideways or fallen slightly (Chart 9). Their range continued to narrow towards its historical average, with the majority of indicators hovering around 1.9% to 2.8%^[7]. Most exclusion-based measures, such as HICP excluding unprocessed food and energy, HICPXX (which refers to HICPX inflation excluding travel-related items, clothing and footwear) and the 10% trimmed mean, decreased by 0.1 percentage points in September. At the same time, the 30% trimmed mean was unchanged, and the weighted median increased slightly to 2.4%, from 2.3% in August.^[8] The domestic inflation indicator, which mainly covers services items, decreased to 4.3% in September, its lowest level since August 2022. However, it remained elevated, reflecting the lagging effect of repricing in some services-related items and the impact of still high wage growth. Both the Supercore indicator (which comprises HICP items sensitive to the business cycle) and the Persistent and Common Component of Inflation (PCCI) were unchanged in September, at 2.8% and 1.9% respectively.

Chart 9

Indicators of underlying inflation

(annual percentage changes)

Most indicators of pipeline pressures for goods inflation remained subdued in August (Chart 10). At the early stages of the pricing chain, producer price inflation for domestic sales of intermediate goods was still negative, but less so than in the previous month (-0.8% in August after -1.1% in July). At the later stages of the pricing chain, the annual growth rates of producer prices for non-food consumer goods decreased slightly to 0.8% in August from 0.9% in July. The annual growth rate of producer prices for food products increased to 0.4% from 0.1% over the same period, confirming previous indications that the gradual easing of pipeline pressures has been fading out in this segment. The annual growth rates of import prices for the consumer goods and non-food consumer goods categories have moved upwards but remain moderate overall. The annual growth rate of import prices for energy decreased substantially to -1.8% in August from 5.0% in July, suggesting a renewed weakening of pipeline pressures at the early stages of the production and pricing chains.

Chart 10

Indicators of pipeline pressures

(annual percentage changes)

Domestic cost pressures, as measured by growth in the GDP deflator, decreased further to 3.0% in the second quarter of 2024 from 3.6% in the previous quarter (Chart 11). This implies substantial disinflation from the peak of 6.4% in the first quarter of 2023, but the rate was still almost twice as high as its long-term pre-pandemic average of 1.6%. The decline in the second quarter of 2024 mainly reflected a decrease in unit labour costs growth, but also a slight decline in unit profits growth. The decrease in labour costs growth was largely due to lower wage growth. While data on negotiated wages point to some volatility in wage developments in the second half of the year, the expected recovery of productivity growth, driven by cyclical factors, combined with lower wage drift should support a further moderation in labour costs growth.

Chart 11

Breakdown of the GDP deflator

(annual percentage changes; percentage point contributions)

Survey-based indicators of longer-term inflation expectations and market-based measures of longer-term inflation compensation were broadly unchanged, with most standing at around 2% (Chart 12). In the ECB Survey of Professional Forecasters (SPF) for the fourth quarter of 2024, average longer-term inflation expectations remained unchanged at 2.0%, as did the median expectations in the October 2024 ECB Survey of Monetary Analysts (SMA). Longer-term market-based measures of inflation compensation (based on the HICP excluding tobacco) were slightly higher over the review period, with the five‑year forward inflation-linked swap rate five years ahead standing at around 2.2%. However, when corrected for model-based estimates of inflation risk premia, market participants expect inflation to be around 2.0% in the longer-term.

Market-based measures of near-term euro area inflation outcomes, as measured by inflation fixings, have declined. These measures suggest that investors expect inflation to rise above 2.0% for the remainder of this year before settling below 2.0% in 2025. Beyond the very short-term, the one-year forward inflation-linked swap rate one year ahead was unchanged at around 1.8% over the review period. On the consumer side, the September 2024 ECB Consumer Expectations Survey (CES) reported that the median rate of perceived inflation over the previous 12 months declined noticeably in September to 3.4%, from 3.9% in August. Meanwhile, median expectations for headline inflation over the next year and for three years ahead continued on a declining path. The former dropped to 2.4% in September, from 2.7% in August, and the latter declined to 2.1% in September from 2.3% in August. The share of consumers reporting inflation perceptions and expectations close to 2% continued to rise in September.

Chart 12

Headline inflation, inflation projections and expectations

a) Headline inflation, survey-based indicators of inflation expectations, inflation projections and market-based measures of inflation compensation

(annual percentage changes)

b) Headline inflation and ECB Consumer Expectations Survey

(annual percentage changes)

4 Financial market developments

During the review period from 12 September to 16 October 2024, euro area financial market movements were influenced by incoming economic data and adjustments in expectations for the path of monetary policy. Euro area short-term interest rates declined over the review period, with market participants anticipating a quicker pace of policy rate cuts during the remainder of 2024 and in early 2025. At the end of the review period, forward rates were pricing in around 49 basis points of cumulative interest rate cuts by the end of the year, with markets almost fully pricing in a rate cut of 25 basis points at the October Governing Council meeting. Euro area long-term risk-free nominal interest rates ended slightly lower, having fluctuated over the review period as incoming data for the euro area and concerns around tensions in the Middle East created uncertainty over the economic outlook. Sovereign bond yields mostly declined in line with the re-pricing of risk-free rates. Prices of risky assets increased over the review period, with equity prices continuing to recover since the summer sell-off, amid a rise in risk appetite. Corporate bond spreads narrowed for both investment-grade and high-yield firms. In foreign exchange markets, the euro depreciated moderately both against the US dollar and, albeit to a lesser extent, in trade-weighted terms.

Since the September Governing Council meeting, the short end of the overnight index swap (OIS) forward curve has shifted downwards, as market participants expect a quicker pace of policy rate cuts (Chart 13). The benchmark euro short-term rate (€STR) averaged 3.5% over the review period, following the Governing Council’s decision at its September meeting to lower the deposit facility rate (DFR) by 25 basis points. In September, the spread between the ECB’s main refinancing rate and the DFR was reduced to 15 basis points, in line with the decision already announced by the Governing Council on 13 March 2024. Excess liquidity decreased by around €87 billion between 12 September and 16 October, to stand at €2,981 billion. This mainly reflected repayments in September of funds borrowed in the third series of targeted longer-term refinancing operations (TLTRO III) and the decline in the portfolios of securities held for monetary policy purposes, as the Eurosystem no longer reinvests the principal payments from maturing securities in the asset purchase programme (APP) portfolio and only partially reinvests principal payments in the pandemic emergency purchase programme (PEPP) portfolio. The short-end of the €STR-based OIS forward curve has shifted downwards since the September Governing Council meeting, amid weaker euro area macroeconomic data releases and expectations of monetary policy easing by major central banks in the near term. On 16 October markets were almost fully pricing in a 25 basis point rate cut at the October Governing Council meeting and anticipating a further 25 basis point reduction at the December meeting. Overall, the forward curve moved from pricing in around 33 basis points of cumulative interest rate cuts in the remaining part of 2024 (as of 12 September) to pricing in around 49 basis points of cumulative cuts (as of 16 October).

Chart 13

€STR forward rates

(percentages per annum)

Euro area long-term risk-free rates have slightly decreased since the September Governing Council meeting, in contrast to their US and UK counterparts (Chart 14). The ten-year euro area OIS rate fell by 3 basis points to around 2.3%, having fluctuated over the review period as incoming data for the euro area and concerns around tensions in the Middle East created uncertainty over the economic outlook. The slight decrease in euro area long-term nominal risk-free rates reflected market expectations for the path of monetary policy in the euro area and stands in contrast to the increase in risk-free interest rates in the United States. In the United States, long-term nominal rates increased strongly, with the ten-year US Treasury yield rising by 34 basis points to 4.0%. This increase reflected stronger than expected US labour market data releases, higher inflation expectations and an adjustment of market expectations for the future level of US nominal interest rates across all maturities. As a result, the differential between long-term risk-free rates in the euro area and the United States has widened by approximately 36 basis points. Meanwhile, the ten-year UK sovereign bond yield increased by 28 basis points to 4.1%.

Chart 14

Ten-year sovereign bond yields and the ten-year OIS rate based on the €STR

(percentages per annum)

Euro area long-term sovereign bond yields mostly decreased in line with risk-free rates (Chart 15). At the end of the review period, the ten-year GDP-weighted euro area sovereign bond yield was 1 basis point lower, at around 2.7%, while its spread over the OIS rate was 2 basis points higher. An increase was observed only for the French ten-year sovereign bond spread against the ten-year OIS yield, which widened by 9 basis points over the review period amid uncertainty regarding France’s fiscal outlook, while the German ten-year sovereign bond spread was less negative by 5 basis points at the end of the review period. A narrowing of sovereign spreads was observed for Greece, Spain, Italy and Portugal, with spreads tightening by between 5 and 11 basis points amid improved risk appetite in financial markets and a more positive sentiment around the fiscal outlook for some of these countries. For example, over the review period Fitch raised the outlook for Portugal’s rating (currently A-) from stable to positive, as it expects a continued reduction in the country’s public debt as a percentage of GDP.

Chart 15

Ten-year euro area sovereign bond spreads vis-à-vis the ten-year OIS rate based on the €STR

(percentage points)

Corporate bond spreads narrowed for both investment-grade and high-yield firms in line with developments in equity prices. Spreads of investment-grade corporate bonds fluctuated but stood 7 basis points lower at the end of the review period. Spreads tightened for both financial and non-financial corporate bonds, with financials tightening more. Similarly, spreads in the high-yield segment narrowed by 8 basis points amid the more positive risk sentiment. High-yield non-financials performed more strongly than financials during the review period.

Euro area equity prices ended the review period higher amid a rebound in risk appetite (Chart 16). The rise in euro area equity prices continued the general trend of recovery since the sell-off during the summer. Risk sentiment improved despite lower earnings expectations, with the equity risk premium contributing strongly to the rise in equity prices. Broad stock market indices in the euro area rose by 2.1% over the review period, with equity prices of non-financial corporations (NFCs) and banks rising by 2.1% and 3.3% respectively. Equities in the United States rose by more than in the euro area, as the release of better than forecast economic data boosted expectations of a stronger economic performance in the United States. The overall US equity price index increased by 4.7% over the review period, with NFC and bank equity prices strengthening by around 4.4% and 11.1% respectively.

Chart 16

Euro area and US equity price indices

(index: 1 January 2020 = 100)

In foreign exchange markets, the euro depreciated moderately both against the US dollar and, albeit to a lesser extent, in trade-weighted terms (Chart 17). Major currencies remained within recent trading ranges amid low volatility. During the review period, the nominal effective exchange rate of the euro – as measured against the currencies of 41 of the euro area’s most important trading partners – depreciated slightly by 0.4%. The moderate depreciation of the euro against the US dollar (-1.1%) was largely driven by swings in global risk sentiment, which affected the US dollar more broadly, and by economic data surprises, which weighed on the euro and supported the US dollar. Following a temporary recovery, the Japanese yen resumed its broad-based depreciation, weakening by 3.5% against the euro. The euro depreciated by 1.2% against the Chinese renminbi following the announcement of a stimulus package in China which included targeted measures aimed at supporting the equity market. It also depreciated against the Swiss franc (-0.2%) as markets pared back their expectations of rate cuts by the Swiss National Bank in the coming months, and against the pound sterling (-1.0%), particularly following a slightly hawkish market interpretation of the September meeting of the Bank of England’s Monetary Policy Committee.

Chart 17

Changes in the exchange rate of the euro vis-à-vis selected currencies

(percentage changes)

5 Financing conditions and credit developments

Shorter-term market interest rates have declined since the September 2024 meeting of the ECB Governing Council, owing mainly to weaker news on the euro area economy and the further fall in inflation. While financing conditions remain restrictive, the average interest rates on new loans to firms and on new mortgages were down slightly in August, to 5.0% and 3.7% respectively. In August composite euro area bank funding costs and bank lending rates remained at tight levels. Growth rates for bank loans to firms and to households continued to be subdued, reflecting high lending rates, weak economic growth and tight credit standards. According to the October 2024 euro area bank lending survey, credit standards for loans to firms remained unchanged in the third quarter of this year, after more than two years of consecutive tightening, while credit standards for housing loans eased further. The demand from firms for loans increased in the third quarter, while remaining weak overall. Housing loan demand rebounded strongly, however. Over the period from 12 September to 16 October 2024, the cost to firms of both market-based debt and equity financing fell, coinciding with a small decline in the long-term risk-free interest rate and a decrease in the equity risk premium. The annual growth rate of broad money (M3) continued to recover from low levels, with net foreign inflows still the main contributor to growth.

Euro area bank funding costs remained high. Following the decline in autumn 2023, the composite debt financing cost for euro area banks has been stable at high levels since January 2024 and saw only a minor decrease in August (Chart 18, panel a). High bank funding costs have persisted amid the ongoing shift in the composition of funding towards more expensive sources, reflecting ongoing adjustments to the higher interest rate environment and the gradual phasing out of funding under targeted longer-term refinancing operations (TLTROs). Interest rates on time deposits edged down in August, while those for overnight deposits and for deposits redeemable at notice remained broadly unchanged, leaving them close to the peak of the current cycle. The yields on bank bonds (Chart 18, panel b), which are a more expensive funding source than deposits, declined significantly against the backdrop of a decline in the long-term risk-free rate (see Section 4).

Bank balance sheets have been robust overall, despite a weak economic environment and increased uncertainty. In the second quarter of 2024, banks continued to improve their capitalisation and maintained capital ratios well above Common Equity Tier 1 (CET1) requirements. Bank profitability remained high in the second quarter, buoyed by sizeable interest rate income and relatively low loan loss provisions. Non-performing loans remained broadly unchanged at the low levels seen in the first quarter of this year. The proportion of underperforming (i.e. Stage 2) loans, especially as regards small firms, has risen slightly compared with the previous year, pointing to worsening asset quality and higher provisioning costs for banks looking ahead.

Chart 18

Composite bank funding costs in selected euro area countries

(annual percentages)

Bank lending rates for firms and those for households declined slightly, while still standing at levels close to the peaks of the past twelve years. In August lending rates for new loans to non-financial corporations (NFCs) fell by 6 basis points to stand at 5.01% (Chart 19, panel a), amid heterogeneity across euro area countries and maturities. Lending rates on new loans to households for house purchase stood at 3.72% in August, down from 3.75% in July (Chart 19, panel b), although with some variation across countries.

Chart 19

Composite bank lending rates for firms and households in selected euro area countries

(annual percentages)

Over the period from 12 September to 16 October 2024, the cost to firms of both market-based debt and equity financing fell. Based on the available monthly data, the overall cost of financing for NFCs – i.e. the composite cost of bank borrowing, market-based debt and equity – stood at 6.1% in August, slightly lower than the level recorded in July and below the multi-year high reached in October 2023 (Chart 20).^[9] This was the result of a reduction in all components of NFC financing costs, most notably in the cost of equity financing. Daily data covering the period from 12 September to 16 October 2024 confirm a further fall in the cost of both market-based debt and equity financing, coinciding with a marginal decline in the long-term risk-free interest rate – as approximated by the ten-year overnight index swap (OIS) rate. The easing of the cost of market-based debt was driven by the significant downward shift of the OIS curve at maturities of up to two years and a slight compression of corporate bond spreads. The reduction in the cost of equity financing derived more from a lower equity risk premium than from the slight decline in the long-term risk-free rate.

Chart 20

Nominal cost of external financing for euro area firms, broken down by component

(annual percentages)

Lending dynamics remained weak in August, although lending to households is showing early signs of improvement. In August the annual growth rate of bank lending to firms increased to 0.8%, up from 0.6% in July (Chart 21), albeit this was due to a large base effect. Short-term bank lending flows for firms decreased in August and this was only partly offset by lending at longer maturities (of more than one year). Net issuance of debt securities by firms picked up in August, broadly offsetting the negative flow recorded in July. The annual growth rate of loans to households edged up to 0.6% in August, from 0.5% in July, the short-term dynamics of its core components having strengthened somewhat over the summer owing to an increase in loans for house purchases (annual growth rising to 0.6% in August), amid stable consumer credit growth (annual growth of 2.8% in August) and the ongoing contraction of other lending (annual growth standing at -2.5% in August). The ECB’s Consumer Expectations Survey in August 2024 confirmed a still large net percentage of survey respondents reporting that credit access had become harder over the previous 12 months and expecting it to become even more difficult over the next 12 months.

Chart 21

MFI loans in selected euro area countries

(annual percentage changes)

According to the October 2024 euro area bank lending survey, banks reported unchanged credit standards for loans to firms in the third quarter of 2024, after more than two years of consecutive tightening, and further easing for housing loans (Chart 22). Credit standards for loans to firms remained unchanged, after more than two years of consecutive tightening, although risk perceptions continued to have a small tightening impact. For households, credit standards eased somewhat more than expected for housing loans, driven primarily by competitive pressures, and tightened more than expected for consumer credit, mainly owing to additional perceived risks. For the fourth quarter of 2024, euro area banks expect a tightening of credit standards for loans to firms and for consumer credit, and continued easing of credit standards for housing loans.

Chart 22

Changes in credit standards and net demand for loans to NFCs and loans to households for house purchase

(net percentages of banks reporting a tightening of credit standards or an increase in loan demand)

In the third quarter of 2024, banks reported a moderate increase in loan demand by firms for the first time since the third quarter of 2022, although the demand remained weak overall, and a strong rebound in housing loan demand. The rise in loan demand by firms was driven by lower interest rates, while fixed investment exerted a muted impact. For housing loans, the increase in demand primarily reflected declining interest rates and improving housing market prospects, whereas the demand for consumer credit was bolstered by consumer confidence and spending on durables. For the fourth quarter of 2024, banks expect demand to increase across all loan segments, especially for housing loans.

The ad hoc survey questions revealed that the impact of ECB policy rate decisions on bank net interest income turned negative for the first time since the end of 2022. Euro area banks reported that ECB interest rate decisions had dampened their net interest margins over the past six months and that the impact in terms of volumes of interest-bearing assets and liabilities remained negative. Banks expect the negative impact on net margins associated with ECB policy rates to deepen, resulting in a decline in overall profitability from the high levels reached during the 2022-23 tightening cycle. Banks also anticipate that rising provisions and impairment charges will weigh marginally on profitability. The reduction in the ECB’s monetary policy asset portfolio had likewise had a slightly unfavourable impact on the market financing conditions of euro area banks over the last six months, and the phasing out of the third series of targeted long-term refinancing operations (TLTRO III) had continued to negatively affect bank liquidity positions. However, in light of the small remaining outstanding amounts under TLTRO III, banks reported a broadly neutral impact on their overall funding conditions and neutral effects on lending conditions and loan volumes.

The annual growth rate of broad money (M3) in the euro area continued to recover, with net foreign inflows still the main contributor to money creation. Annual M3 growth increased to 2.9% in August, up from 2.3% in July (Chart 23). Annual growth of narrow money (M1) – which comprises the most liquid assets of M3 – stayed in negative territory but continued to strengthen, rising to ‑2.1% in August compared with ‑3.1% in July. Likewise, the annual growth rate of overnight deposits rose to ‑2.5% in August, up from ‑3.6% in July. Foreign inflows remained the main source of money creation, given the ongoing marginal contribution of lending to households and to firms. The continuing contraction of the Eurosystem balance sheet and the issuance of long-term bank bonds (which are not included in M3) amid the phasing out of TLTRO funding by the end of 2024 contributed negatively to money creation.

Chart 23

M3, M1 and overnight deposits

(annual percentage changes, adjusted for seasonal and calendar effects)

Boxes

1 Geopolitical fragmentation in global and euro area greenfield foreign direct investment

Prepared by Lukas Boeckelmann, Lorenz Emter, Isabella Moder, Giacomo Pongetti and Tajda Spital

This box reviews recent developments in global and euro area greenfield foreign direct investment (FDI) and analyses the role of geopolitics in shaping these. As firms and policymakers increasingly look at ways to reduce the vulnerability of their supply chains, understanding recent dynamics in greenfield investment is important as these may foreshadow a reconfiguration of global trade networks, the fragmentation of which could be particularly detrimental for the euro area.^[10] Greenfield FDI flows refer to foreign investments made by companies to build new or extend existing production capacity. In the last decade, annual FDI outflows and inflows amounted to 1.4% and 0.6% respectively of euro area GDP and 1.0% and 1.2% respectively of global GDP excluding the euro area. The euro area is the largest source of outward greenfield FDI, accounting for 19% of global outflows in the last two years, followed by the United States, which accounted for 15%. This box uses information on announced greenfield FDI projects from a dataset provided by fDi Markets.^[11]

2 The link between oil prices and the US dollar: evidence and economic implications

Prepared by Martino Ricci

In recent years rising oil prices have often coincided with a strengthening of the US dollar – which has potentially intensified inflation dynamics in the euro area. Historically, there has been no clear link between oil prices and the US dollar (Chart A, panel a). In the period after the global financial crisis, the correlation tended to be negative. This co-movement was most likely the result of specific shocks – in particular shifts in global risk aversion – which sent oil prices and the US dollar in opposite directions (Chart A, panel b), rather than the reflection of a causal relationship.^[12] However, recent studies suggest that the emergence of the United States as an oil exporter has been a factor in rendering the correlation consistently positive.^[13] As crude oil is mainly traded in US dollars, a systematically positive co-movement would imply that the price of oil in local currency is more volatile than the dollar price of oil. This could strengthen the inflationary impact of oil shocks in net oil importers such as the euro area. The empirical models presented in this box show that the co-movement observed still seems to be largely the result of specific shocks that have steered both variables in the same direction rather than the reflection of a structural change in the link between oil prices and the US dollar.

3 The impact of special-purpose entities on euro area cross-border financial linkages

Prepared by Lorenz Emter, Fausto Pastoris, Carmen Picón Aguilar and Martin Schmitz

Newly released ECB data on special-purpose entities (SPEs) show that these have a considerable impact on euro area cross-border financial linkages. In the context of external sector statistics, SPEs are defined as legal entities controlled by non-resident investors with no autonomy of decision-making and no meaningful economic activity in the country of incorporation.^[14] The interpretation of global cross‑border statistics has become challenging in recent decades owing to the growing importance of financial centres and the increasing complexity of financial intermediation chains.^[15] Multinational enterprises (MNEs), in particular, tend to use complex organisational structures involving numerous entities (including SPEs) as part of their tax optimisation and profit maximisation efforts. Hence, data on SPEs are essential for proper analysis of euro area financial linkages. The newly released ECB data identify the external transactions and positions of SPEs separately. This allows the impact of SPEs on the cross-border financial linkages of individual euro area countries and the euro area as a whole to be investigated.^[16]

4 Main findings from the ECB’s recent contacts with non‑financial companies

Prepared by Gwenaël Le Breton, Richard Morris and Moreno Roma

This box summarises the findings of recent contacts between ECB staff and representatives of 95 leading non-financial companies operating in the euro area. The exchanges took place between 16 and 26 September 2024.^[17]

Contacts pointed to a slowdown in business momentum over the summer months, largely observed in the industrial sector (Chart A and Chart B, panel a). This reflected, in particular, growing concerns about competitiveness and mounting uncertainty surrounding the green transition as well as both European and global political developments. This was causing businesses to scale back investment and focus on cost cutting, which also weighed on consumer confidence. The overall picture was nonetheless still consistent with modest growth in overall activity, as continued growth in services offset contracting manufacturing output. Overall activity tended to be below prior expectations, mainly in Germany and France, but was generally more resilient elsewhere.

5 What consumers think is the main driver of recent inflation: changes in perceptions over time

Prepared by Pedro Baptista, Colm Bates, Omiros Kouvavas, Pedro Neves and Katia Werkmeister

Understanding how consumers perceive drivers of inflation is crucial for interpreting shifts in their inflation expectations, which can significantly influence real economic decisions. The narratives consumers construct to explain inflation play a key role in shaping their expectations, with different drivers – such as wages or profits – implying different degrees of inflation persistence.^[18] To explore this further, in June 2023 and March 2024 the ECB’s Consumer Expectations Survey (CES) asked consumers to select what they thought had been the main driver of the 2022-23 surge in inflation from three answer options: firms’ profits, wage costs, or other input costs. While consumer perceptions shifted, notably in the lead-up to early 2024, they have since stabilised, making the March 2024 survey data indicative of broader trends. Analysing these evolving perceptions helps explain adjustments in inflation expectations and how shifts in macroeconomic narratives affect inflation dynamics going forward.

6 The performance of Eurosystem/ECB staff projections for economic growth since the COVID-19 pandemic

Prepared by Adrian Page

In the post-pandemic period, Eurosystem/ECB staff projections for growth have performed well over short horizons, despite the large shocks that have occurred. While the performance of inflation projections since the start of the pandemic has been extensively documented in previous issues of the Economic Bulletin, this box looks at how the Eurosystem/ECB staff projections for real GDP growth have fared during this turbulent period.^[19] The growth fluctuations in 2020 related to the initial phases of the pandemic could not have been predicted, resulting in historically high forecast errors.^[20] This box therefore focuses on the performance of the projections made after the start of the pandemic. During this period, the near-term growth forecasts have been remarkably accurate (Chart A, panel a). With only some exceptions during 2021, when growth continued to be affected by the pandemic’s unpredictable path and the associated containment measures, errors in next-quarter projections for real GDP growth have been even smaller than usual despite large shocks, including those caused by supply chain disruptions and Russia’s war in Ukraine.

7 Decoding revisions in policy rate expectations: insights from the Survey of Monetary Analysts

Prepared by Yıldız Akkaya and Boryana Ilieva

During the rate-hiking cycle in 2022 and 2023, financial market participants and analysts made frequent and sizeable adjustments to their expectations for ECB policy rate levels. Between July 2022 and September 2023, respondents to the Survey of Monetary Analysts (SMA) continuously revised their interest rate path expectations, with the expected peak for the deposit facility rate (DFR) being raised by 350 basis points from 0.5% to 4% (Chart A).

8 Euro area fiscal position in 2024

Prepared by Cristina Checherita-Westphal, Sebastian Hauptmeier, Nadine Leiner-Killinger and Philip Muggenthaler

After years of fiscal support to mitigate the impact of the COVID-19 pandemic and the recent energy crisis, plans were made to improve the euro area countries’ fiscal positions more markedly in 2024. The general escape clause embedded in the EU’s Stability and Growth Pact was activated over 2020-23 to ensure that fiscal policies could provide the support needed by EU economies to address the adverse impact of the pandemic and the energy crisis. For 2024, the European Council agreed in June 2023 on country-specific recommendations for fiscal policies.^[21] These called for fiscal policy normalisation as the energy crisis gradually faded. At the same time, the fiscal guidance reflected the fact that 2024 would be a year of transition towards a reformed EU fiscal framework. The new framework came into force on 30 April 2024 with a view to becoming operational as of 2025.^[22] Against this background, this box provides an overview of euro area fiscal developments in 2024, as reflected by revisions to fiscal positions across various rounds of Eurosystem and ECB staff macroeconomic projections for the euro area.

Articles

1 The ECB’s accountability to the European Parliament 2019-2024: commitment in times of change

Prepared by Ferdinand Dreher, Nils Hernborg, Sarah Mochhoury, Timothy Mulder and Hanni Schölermann

The independence of the ECB, particularly in its monetary policy decisions, ensures that it can effectively pursue price stability. At the same time, this independence is counterbalanced by accountability to ensure that the ECB remains answerable to the public and its representatives, thereby providing democratic legitimacy for its actions. The ECB’s accountability is primarily exercised through regular reporting to the European Parliament. This includes the publication of the ECB’s Annual Report, regular appearances before the European Parliament by the President of the ECB, and the answering of written questions from Members of the European Parliament (MEPs). The dialogue with the European Parliament allows the ECB to answer the questions and concerns of elected representatives, explain its actions and policies in detail, clarify its objectives and demonstrate how it is fulfilling its mandate. This enables EU citizens and their representatives to better understand the ECB’s policies and to form a judgement about its performance in respect of its mandate, thereby ensuring transparency and maintaining public trust.^[23]

2 The Survey on the Access to Finance of Enterprises: monetary policy, economic and financing conditions and inflation expectations

Prepared by Annalisa Ferrando, Sara Lamboglia, Judit Rariga, Nicola Benatti and Ioannis Gkrintzalis

The Survey on the Access to Finance of Enterprises (SAFE) provides a comprehensive overview of the economic and financing conditions of firms across the euro area.^[24] The SAFE, launched in 2009, is a euro area survey conducted jointly by the European Central Bank (ECB) and the European Commission. It gives crucial insight into the financing conditions of firms, their economic performance, and, more recently, their expectations with regard to selling prices, wages, number of employees and overall consumer price inflation in the euro area. The survey provides the ECB with highly informative data that feeds directly into the monetary policy decision-making process.

Statistics