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ECB-CONFIDENTIAL

The euro area inflation outlook: a scenario analysis

•

19 September 2024

Isabel Schnabel, Member of the Executive Board of the ECB Meeting of the Economic and Monetary Policy Committee, Association of German Banks www. ecb. europa. eu ©

1

Sticky services inflation is keeping headline inflation at elevated level Rubric

(annual percentage changes and percentage point

HICP inflation

contributions)

Energy

Food

NEIG

Services

HICP

Non-energy industrial goods (NEIG)

and services inflation (annual percentage changes)

NEIG Services

7

6

5

4

3

2

1

0

12

10

8

6

4

2

0

1. 9

0. 6

-1 1999 2002 2005 2008 2011 2014 2017 2020 2023 2024

Sources: Eurostat and ECB calculations.

Notes: The dashed lines indicate the historical averages from 1999-2019.

Latest observation: August 2024.

-2

2020

2021

2022

2023

2024

Aug-24

Sources: Eurostat and ECB calculations.

Latest observation: August 2024.

2

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Price pressures in the services sector are broad-based and global Rubric

Decomposition of HICPX inflation

(annual percentage changes and percentage point contributions)

NEIG Services, not wage-sensitive Services, wage-sensitive HICPX

6

5

4

3

2

1

0

1. 2

2. 0

2. 6

Mar-23

0. 9

1. 6

0. 3 Jul-24

0. 9

1. 7

0. 2

Aug-24

Sources: Eurostat and ECB calculations.

Notes: Wage-sensitive services items are those with wage costs above 38% of direct input costs.

Latest observation: August 2024.

Global (excluding euro area) and euro area

core services inflation (annual percentage changes)

Global (excl. EA)

EA

6

5

4

3

2

1

0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Sources: Eurostat, national sources and OECD via Haver Analytics and ECB staff calculations.

Notes: Global (excl. EA) aggregate is a weighted average calculated based on 22 countries, including 7 advanced economies (US, UK, JP, CA, NO, DK, CH, SE) and 14 emerging economies (CN, TW, KR, ZA, MX, CL, RU, MY, CO, EG, CZ, IN, BR, HK), covering roughly 72% of global (excl. EA) GDP-PPP.

Core inflation excludes food and energy.

Latest observation: July 2024 (Global) and August 2024 (EA).

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3

Momentum in services remains high and above levels consistent with price stability Rubric

Services inflation: momentum

(annualised 3-month- on-3-month percentage changes)

Momentum of services inflation

7

6

5

4

3

2

1

0

-1 Jan-20

Jan-21

Jan-22

Jan-23

Jan-24

Sources: Eurostat and ECB calculations.

Notes: Calculated using seasonally adjusted data.

Latest observation: August 2024.

Gross value- added deflator of services

over manufacturing

(indices 1997 = 1)

EA

US

JP

1. 6

1. 5

1. 4

1. 3

1. 2

1. 1

1. 0

1997 2000 2003 2006 2009 2012 2015 2018 2021

Sources: Eurostat, Bureau of Economic Analysis and Cabinet Office of Japan via Haver Analytics and ECB staff calculations.

Latest observation: 2022 (Japan) and 2023 (US and EA).

4

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Medium-term inflation projections often clustered around 2% target Rubric

Realised inflation and inflation projections

(annual percentage changes)

Sources: Conrad, C. and Enders, Z. (2024), “The limits of the ECB's inflation projections”, SUERF Policy Brief No. 945.

Notes: Scatterplot for period 2001 Q2 to 2024 Q1.

5

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Private sector forecasts suggest conditions for soft landing remain in place Rubric

GDP growth projections for 2025 for major economies

(% change)

Source: Consensus Forecasts.

Latest observation: 09 September 2024.

6

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Inflation perceptions remain high, making expectations more fragile to new shocks Rubric

Headline inflation and inflation perceptions

(annual percentage changes; percentages)

HICP

Perceptions: inflation has risen a lot over last 12 month (rhs)

14

12

10

8

6

4

2

0

-2 1999

2007

2003

2011 Sources: European commission and Eurostat.

Notes: Price trends over last 12 months are non-seasonally adjusted.

Latest observations: August 2024.

2015

2019

70

60

50

40

30

20

10

0

-10

2023

Survey of professional forecasters (SPF): Cross-sectional distribution of long-term

inflation point forecasts (percent)

2003Q3-2014Q1 2019Q1-2021Q3 2024Q2

2014Q2-2018Q4 2021Q4-2024Q1 2024Q3

60 55 50 45 40 35 30 25 20 15 10 5 0

2 .

1 ≤

3 .

1

4 .

1

5 .

1

6 .

1

7 .

1

8 .

1

9 .

1

0 .

2

1 .

2

2 .

2

3 .

2

4 .

2

5 .

2 ≥

Sources: SPF and ECB calculations.

Notes: Vertical axis shows percent of respondents; horizontal axis shows the HICP inflation rate. Longer- term expectations refer to 4-5 years ahead.

Latest observation: Q3 2024 SPF.

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7

Wage growth expected to slow down as past price shocks unwind Rubric

Model-based decomposition of

negotiated wage growth

(year-on-year growth rate, percentage point contributions)

Residuals Wage response to slack and productivity Wage response to price inflation Initial conditions Wage growth

6

5

4

3

2

1

0

-1

-2

2020

2021

2019

2024 Source: ECB calculation is based on Arce, O. , Ciccarelli, M. , Kornprobst, A. and Montes-Galdon, C. (2024), “What caused the euro area post-pandemic inflation?”, Occasional Paper Series, No 343, ECB.

Latest observation: 2024 Q1.

2023

2022

Survey-based wage growth expectations

(annual percentage changes)

CTS July 2024

SPF 2024 Q3

September 2024 MPE

Consensus September 2024

SAFE 2024 Q2

2024

2025

2026

5. 0

4. 5

4. 0

3. 5

3. 0

2. 5

Sources: July 2024 Corporate Telephone Survey (CTS), Q3 2024 Survey of Professional Forecasters (SPF), September 2024 MPE, September 2024 Consensus economics and Q2 2024 Survey on the Access to Finance of Enterprises (SAFE).

8

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Firms expect selling price increases to moderate as profit margins buffer higher wages Rubric

SAFE: Average expectations for selling

prices one year ahead

(percentage changes over the next 12 months)

(annual percentage changes and percentage point

GDP deflator

contributions)

Mar-23

Sep-23

Dec-23

Mar-24

Jun-24

Unit labour costs Unit net taxes

Unit profits GDP deflator

7

6

5

4

3

2

1

0

7. 0

6. 0

5. 0

4. 0

3. 0

2. 0

1. 0

0. 0

All firms

Services

Other

Source: Survey on the Access to Finance of Enterprises (SAFE).

Notes: The statistics are computed after trimming the data at the country-specific 1st and 99th percentiles.

Last observation: Q2 2024.

9

-1

Q1 23 Q2 23 Q3 23 Q4 23 Q1 24 Q2 24 Sources: Eurostat, September MPE and ECB calculations.

Notes: Unit taxes reflect taxes minus subsidies. When the contribution of subsidies on products is larger than the contribution of indirect taxes, the unit tax contribution turns negative.

Latest observation: Q2 2024.

2024 2025 2026

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Monetary policy is incentivising people to save more and spend less Rubric

Expected savings over the next 12 months

(net percentage balances)

10

5

0

-5

-10

-15

M3 deposits by households

(monthly flows in € bn) Overnight deposit flows Deposits redeemable at notice Time deposit flows

80

60

40

20

0

-20

-40

-60

-80

-20

1985

1990

1995

2000

2005

2010

2015

2020 2024

Source: European Commission Survey.

Latest observation: August 2024.

2 2 - l u J

2 2 - p e S

2 2 - v o N

3 2 - n a J

3 2 - r a M

3 2 - y a M

3 2 - l u J

3 2 - p e S

3 2 - v o N

4 2 - n a J

4 2 - r a M

4 2 - y a M

4 2 - l u J

Sources: ECB (BSI) and ECB calculations.

Notes: M3 time deposits are those with a maturity of up to two years; M3 deposits redeemable at notice are those up to three months.

Latest observations: July 2024.

10

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Real wage catch-up remains incomplete in large parts of the euro area Rubric

Real compensation per employee

(indices: 2019 Q4 = 100)

DE

ES

IT

PT

FI

EA

115

110

105

100

95

90

85

19Q4

20Q4

21Q4

22Q4

23Q4

Sources: ECB, BIS and ECB staff calculations.

Notes: Compensation per employee is deflated by national CPI for Germany (DE), Spain (ES), Italy (IT), Portugal (PT) and Finland (FI). The euro area (EA) is deflated by HICP.

Last observations: 2024 Q2.

11

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Labour demand remains high amid low unemployment and persisting labour shortages Rubric

Labour as a factor limiting business

Services:

(percentages)

Vacancies to unemployment ratio

(vacancies over unemployed people)

0. 4

0. 3

0. 2

0. 1

40

35

30

25

20

15

10

5

0. 0 Q1 2006 Q4 2009 Q3 2013 Q2 2017 Q1 2021 Q2 2024

0 Q3 2003 Q4 2007 Q1 2012 Q2 2016 Q3 2020 Q3 2024

Sources: Eurostat, LFSI and ECB staff calculations.

Last observation: Q2 2024.

Source: European Commission.

Last observation: Q3 2024.

12

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Pass-through of higher wages to producer prices is stronger in the services sector Rubric

Wage-producer price pass-through

(coefficients)

All sectors

Industry

Services

1. 25

1. 00

0. 75

0. 50

0. 25

0. 00

-0. 25

0

4

8

12

16

20

1. 25

1. 00

0. 75

0. 50

0. 25

0. 00

-0. 25

0

4

8

12

16

20

Source: Ampudia, Lombardi and Renault (forthcoming).

Notes: Vertical axis shows response in cumulated producer price inflation to a 1% increase in cumulated wage growth. Horizontal axis shows the window length (in quarters). Industry covers mining, manufacturing and utilities. Services include retail and wholesale trade, transportation, accommodation, food services, information and communication. The lines show 90% confidence intervals.

13

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Demand for services has been resilient but is starting to weaken Rubric

Euro area private consumption

(index: Q4 2019 = 100)

Private consumption

Services

Goods

104

103

102

101

100

99

98

97

Demand as a factor limiting business

Services:

(percentages)

50

45

40

35

30

25

96 Q1 22

Q3 22

Q1 23

Q3 23

Q1 24

20

2010

2012

2014

2016

2018

2020

2022

2024

Sources: Eurostat and ECB staff calculations.

Notes: Goods and services consumption based on aggregation of domestic household consumption.

Latest observation: Q2 2024.

14

Source: European Commission.

Latest observation: Q3 2024.

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Signs that transmission of monetary policy tightening is weakening Rubric

Changes in demand for loans to enterprises (net percentages of banks reporting an increase in demand)

Changes in demand for loans to households (net percentages of banks reporting an increase in demand)

Other factors Use of alternative finance Other financing needs General level of interest rates Inventories and working capital Fixed investment Demand - actual Demand - expected

60 40 20 0 -20 -40 -60 -80 -100

50

0

-50

-100

-150

-200

-250

Other factors Use of alternative finance Other financing needs General level of interest rates Consumer confidence Housing market prospects Demand - actual Demand - expected

2 Q 2 2 0 2

3 Q 2 2 0 2

4 Q 2 2 0 2

1 Q 3 2 0 2

2 Q 3 2 0 2

3 Q 3 2 0 2

4 Q 3 2 0 2

1 Q 4 2 0 2

2 Q 4 2 0 2

3 Q 4 2 0 2

Source: ECB Bank Lending Survey, Second Quarter of 2024.

Notes: “Actual” values are changes that have occurred, while “expected” values are changes anticipated by banks. Net percentages for the questions on demand for loans are defined as the difference between the sum of the percentages of banks responding “increased considerably” and “increased somewhat” and the sum of the percentages of banks responding “decreased somewhat” and “decreased considerably”.

15

2 Q 2 2 0 2

3 Q 2 2 0 2

4 Q 2 2 0 2

1 Q 3 2 0 2

2 Q 3 2 0 2

3 Q 3 2 0 2

4 Q 3 2 0 2

1 Q 4 2 0 2

2 Q 4 2 0 2

3 Q 4 2 0 2

Source: ECB Bank Lending Survey, Second Quarter of 2024.

Notes: “Actual” values are changes that have occurred, while “expected” values are changes anticipated by banks. Net percentages for the questions on demand for loans are defined as the difference between the sum of the percentages of banks responding “increased considerably” and “increased somewhat” and the sum of the percentages of banks responding “decreased somewhat” and “decreased considerably”.

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Geopolitical uncertainty remains a key risk to the outlook Rubric

Shipping prices (indices, January 2020 = 1)

Shanghai to Rotterdam Shanghai to New York Los Angeles to Shanghai Composite

Shanghai to Los Angeles Rotterdam to Shanghai Shanghai to Genoa

8

6

4

2

0 Jan-20

Jan-21

Jan-22

Jan-23

Jan-24

Sources: Drewry and ECB staff calculations.

Notes: Drewry freight costs (for forty-foot equivalent unit shipping container).

Latest observation: 12 September 2024.

16

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Measurable rise in global trade measures, especially on critical raw materials Rubric

Global trade measures (lhs: number; rhs: percentage)

Percentage of G20 exports exposed to trade distortions (rhs) Liberalising measures annouced by all countries Harmful measures annouced by all countries

50%

40%

30%

20%

10%

0%

2009

2011

2013

2015

2017

2019

2021

2023

4000

3500

3000

2500

2000

1500

1000

500

0

70

60

50

40

30

20

10

0

Critical raw materials

subject to export restrictions

(% of exports)

2022

2017

Chart from Sintra (Beata)

World average 2022

World average 2017

Sources: Global Trade Alert (GTA) and ECB staff calculations.

Notes: Total number of liberalising and harmful measures announced globally each year (adjusted for reporter lag at 31 of December each year). For the rhs series, affected flow includes outward and outward subsidies that are evaluated as red and harmful by the GTA during the coverage period shown without an adjustment for reporting lag.

Latest observation: 2023.

17

Source: EBRD Transition Report 2023-24.

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Thank you very much for your attention!

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