European Banking Congress- Monetary Policy And The Outlook For The Economy
Speech by Mario Draghi, President of the ECB, at the Frankfurt European Banking Congress “Europe into a New Era – How to Seize the Opportunities”, Frankfurt am Main, 17 November 2017
I would like to expose you to the recent speech by Mario Draghi, which he described how the euro area economy is developing and explain our latest monetary policy decisions. The economic recovery is continuing but inflation developments remain subdued. So, while we are confident in the recovery, we still need a patient and persistent approach to our monetary policy to ensure that medium-term price stability is achieved.
The Euro Area Economic Recovery
The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward. There are three factors in particular that suggest this.
First, the major headwinds that were weighing on the recovery in recent years have now largely dissipated, although downside risks still remain related to external factors. Affiliate Link(The Unexpected Bitcoin Cryptocurrency News)
For some years global growth and world trade have been a drag on the recovery. Now, we are seeing signs of a sustained expansion. Global PMIs remain strong. The share of countries in which growth has been improving relative to the previous three years has risen from 20% in mid-2016 to 60% today. And this has fed through into a rebound in world trade, which is growing at its strongest annual rate in six years, and may well become a tailwind going forward.
Domestically, a key headwind in the past has been the necessary deleveraging by firms and households. But this is also now diminishing as debt returns to more sustainable levels.
For the euro area, gross corporate debt to value added is now roughly back to its pre-crisis level. In vulnerable countries the decline has been steeper. In Spain, corporate debt has fallen from 215% of gross value added in early 2012 to close to 150% today – the same level it had at the end of 2004. Italian firms have seen their debt ratio fall by around 30 percentage points since end 2012, returning to the same level as in mid-2007.
For households, gross indebtedness is also edging down and now stands just below its mid-2008 level. And importantly for the recovery, household deleveraging is now happening largely “passively” – i.e. through nominal growth – rather than “actively”, that is, through paying down debt or write offs. We estimate that the monetary policy measures we have implemented in recent years will reduce the household debt ratio by 1.5% of GDP from 2015 to 2019, and by 2% for firms over this period.
The recovery therefore has not come against the backdrop of re-leveraging in any economic sector. In fact, monetary policy is helping to reduce leverage and produce a more sustainable upswing, which should in turn facilitate further balance sheet adjustment. Link(30 Minute Money Methods)
The second factor that gives us confidence in the recovery is that the drivers of growth are increasingly endogenous rather than exogenous. In the early phase of the recovery, its main motors were falling oil prices and monetary policy. Now, we see more signs that growth is “feeding on itself”, i.e. spending multipliers and endogenous propagation are again supporting activity.
This cycle is most evident for private consumption, which has remained robust even as oil prices have risen by about 30 dollars since the start of 2016. Consumption is being supported by a virtuous circle between rising labour income and rising employment. Employment in the euro area has reached its highest level ever, while unemployment has fallen to its lowest rate since January 2009.
Importantly, this has taken place against the backdrop of a rising participation rate, which is now 2 percentage points above its pre-crisis level. This has been driven in particular by the increased entry of women into the workforce, whose participation rate has risen by 4 percentage points since 2008 and reached an all-time high.
It has also been strongly driven by older people. Since the start of the crisis, the participation rate has increased by 3.6 percentage points for people aged 50-54, 13.6 percentage points for 55-59 year olds and 17.1 percentage points for 60-64 year olds. The fact that unemployment has fallen so much while labour participation has been rising is a remarkable success story.
As consumption has strengthened and spending multipliers have taken hold, investment has also followed with a lag. Since 2016, investment has contributed almost 45% to annual GDP growth, compared with under 30% in the two years previously.
The third factor that signals a robust recovery is that the economy may be becoming more resilient to new shocks. This is the result of two ongoing trends.
One is the increasing convergence among euro area countries across a range of indicators. The dispersion of both employment and GDP growth between euro area countries is now at record low levels. The previous divergence in credit conditions has also largely disappeared. (Hire A Professional Forex Coach For 2Weeks)
For very small loans – which are a proxy for the financing conditions facing SMEs – the spread between vulnerable and less vulnerable countries has fallen from 170 basis points in mid-2014 to 2 basis points today. For the first time since 2009, loans to firms are moving into positive territory in all major euro area economies. And demand for loans by firms, which at this time last year was still negative in several vulnerable countries, is now positive across the whole euro area.
The other trend is the growing resilience of the financial sector. The total capital ratio of significant banks has increased by more than 170 basis points since early 2015. Their return on equity has risen from 4.4% at the end of 2015 to 7.1% at the start of this year, even as their leverage ratios have declined. All banks have benefited from the upward trend in returns on assets since the start of our monetary policy easing in 2014, although in some cases starting from low levels. Clearly this trend hides some variation among banks, which is largely driven by differences in their business models.
As regards bank profitability, ECB research finds little evidence that our monetary policy is currently doing harm. Net interest income has remained quite stable over the past two years. If there are any negative effects of low rates on net interest income in the future, they should be largely offset by the positive effects of monetary stimulus on the other main components of profitability, such as the quality of loans and therefore on loan-loss provisions.
Low-for-long interest rates might contribute to a build-up of financial risks, and this has to be carefully monitored. At present we do not see systemic risks emerging at the euro area level. If there are some local pockets of risk, the defence lies in micro-prudential and macro-prudential policies, not changing area-wide monetary policy. Furthermore, in such an environment any backtracking on financial regulation would be a mistake, as the pre-crisis experience has shown.
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