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Peter Praet Member of the Executive Board of the ECB European Monetary and Financial Outlook 26th Annual Hyman P. Minsky Conference on the State of the US and World Economies 19 April 2017 Rubric 6-10 years ahead euro area growth expectations Real GDP growth (percentage per annum) 2.25 2.25 2.00 2.00 1.75 1.75 1.50 1.50 1.25 1.25 1.00 2003 1.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Consensus Economics. Latest observation: October 2016. . 2 www.ecb.europa.eu Rubric Declining expectations of long-term growth Potential euro area output reduction due to crisis (index 1999 = 100) Potential GDP Actual GDP Counterfactual Potential GDP 140 140 130 130 120 120 110 110 100 1999 100 2001 2003 2005 2007 2009 2011 2013 2015 Sources: European Commission. Note: The counterfactual potential GDP path assumes that potential GDP continued to grow at its 2007 growth rate. Latest observation: 2016. 3 www.ecb.europa.eu Rubric Conditions for a balance sheet recession Real GDP and pre-crisis expected path Bank loans to private sector (index 2007 = 100) (annual percentage change) EA DE ES EA 130 DE ES 30 130 Actual growth vvv 25 Expected growth path in 2007 120 20 120 15 110 10 110 5 100 0 100 -5 90 2006 -10 2003 90 2008 2010 2012 2014 2016 2005 2007 2009 2011 2013 2015 2017 Source: ECB. Latest observation: February 2017. Source: ECB, Consensus Economics, ECB calculations Note: Dotted lines represent evolution of GDP based on private sector expectations in October 2007. Latest observation: 2016. 4 www.ecb.europa.eu Recent Rubric developments and short-term outlook Euro area real GDP growth, composite PMI and ESI (q-o-q % change, index and percentage balance) Real GDP (rhs) ESI Composite PMI March MPE 2017 (rhs) 70 2 60 1 50 0 40 -1 30 -2 20 2008 -3 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Markit, DG-ECFIN, Eurostat, ECB and MPE. Note: ESI is rescaled using the PMI standard deviation. Latest observations: 2016Q4 (GDP), February 2017 (ESI and PMI), 2017Q4 (March MPE 2017). 5 www.ecb.europa.eu Rubric Sovereign bond yields Dispersion of euro area sovereign bond yields (percentage per annum) 2-year maturity Min-max range Average euro area Spain Portugal 25 10-year maturity Interquartile range Ireland Italy 25 25 20 20 15 15 10 10 5 5 0 0 -5 2007 2009 2011 2013 2015 Interquartile range Ireland Italy 25 20 20 15 15 10 10 5 5 0 0 -5 2007 -5 Min-max range Average euro area Spain Portugal -5 2009 2011 2013 2015 2017 Sources: Thomson Reuters and ECB calculations. Note: The data used is based on euro area country composition as in 2011. The yields for Greece, Cyprus, Estonia, Luxembourg, Malta and Slovenia are excluded owing to infrequent or a lack of observations. Latest observation: 3 March 2017. 6 www.ecb.europa.eu Rubric finances Public Euro area government debt and deficit (% of GDP) 100 100 2014 2015 2012 2013 2016 90 90 Debt ratio 2010 2011 80 80 2009 70 2004 2005 2008 2000 2006 2003 2002 70 2001 2007 60 60 -7 -6 -5 -4 -3 Budget balance -2 -1 0 Source: European Commission’s winter 2017 economic forecast. Latest observation: 2016. 7 www.ecb.europa.eu Rubric Price of inflation and deflation protection Price of inflation and deflation protection (basis points) Price of inflation protection Price of deflation protection 400 400 300 300 200 200 100 100 0 2008 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: Bloomberg. Latest observation: 12 April 2017. 8 www.ecb.europa.eu The ECB response Rubric Post-Lehmann phase: Elastic provision of long-term liquidity to banks under full allotment LTROs • Placed ceiling on money market rates, safeguarded access to funding for banks in liquidity deficits • Large endogenous expansion of balance sheet contained fragmentation, restored confidence. But: expansion of Eurosystem balance sheet was only temporary and non-discretionary … … so that measures lost traction as banks started actively contracting their exposures and reimbursing ECB loans, leading to a contraction of money Debt crisis: Targeted interventions in securities markets (SMP) and conditional commitment to stamp out break-up risk compensation from bonds of stressed jurisdictions (OMT) • OMT acted as potent circuit breaker and restored financial stability SMP and OMT But: confidence crisis had undermined banks’ willingness and capacity to keep credit flowing in vast portion of the euro area … and tightening borrowing conditions amplified renewed slump, jeopardizing macroeconomic and price stability Transmission and deflation risks: TLTROs, neg. DFR, APP • TLTROs give banks incentives to increase loan supply and reduce borrowing costs for the real economy • Asset purchases compress term spreads on securities encouraging portfolio rebalancing towards assets with a higher risk-adjusted return • Negative DFR discourages liquidity hoarding and speeds up asset reallocation 9 www.ecb.europa.eu Rubric of VLTROs and OMT in Spain Impact Banks’ vs. sovereign CDS premia (basis points) 900 2010Q1 2011Q4 800 2011Q4 800 2012Q1 700 700 600 600 Bank CDS Bank CDS Deterioration in banking sector 900 500 400 500 400 300 300 200 200 100 100 0 0 0 100 200 300 400 500 600 700 800 900 0 100 200 Sovereign CDS 300 400 500 600 700 800 900 Sovereign CDS 900 900 Summer 2012 intensification of crisis 2012Q1 800 2012Q2 800 2012Q2 2013Q1 700 700 600 600 Bank CDS Bank CDS Impact of VLTROs 500 400 500 400 300 300 200 200 100 100 0 2016Q4 Impact of OMT announcement and current levels 0 0 100 200 300 400 500 600 700 800 0 900 200 300 400 500 600 700 800 900 Sovereign CDS Sovereign CDS Source: Thomson Reuters, ECB calculations. Notes: Charts show daily observations during a given quarter. Last observation: 30 December 2016. 100 10 www.ecb.europa.eu Rubric of VLTROs and OMT in Italy Impact Banks’ vs. sovereign CDS premia (basis points) 700 700 600 2012Q1 500 Bank CDS 500 400 300 400 300 200 200 100 100 0 0 0 100 200 300 400 500 600 0 700 100 200 Sovereign CDS 300 400 500 600 700 Sovereign CDS 700 Summer 2012 intensification of crisis 700 2012Q1 600 2012Q2 600 2012Q2 500 2013Q1 2016Q4 500 Bank CDS Bank CDS Impact of VLTROs 2011Q4 2010Q1 2011Q4 600 Bank CDS Deterioration in banking sector 400 300 400 300 200 200 100 100 0 Impact of OMT announcement and current levels 0 0 100 200 300 400 500 600 700 0 Sovereign CDS Source: Thomson Reuters, ECB calculations. Notes: Charts show daily observations during a given quarter. Last observation: 30 December 2016. 100 200 300 400 500 600 700 Sovereign CDS 11 www.ecb.europa.eu Rubric Euro area and US forward rates 1y OIS forward rates Forward interest rates: 1-year 1 year ahead (percentage per annum) (percentage per annum) EA 22-May-13 US 22-May-13 EA 12-Apr-17 US 12-Apr-17 3 EA 3 2 US 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 2 1 1 0 0 -0.5 -1 -1.0 2013 -1 1y1y 1y2y 1y3y -0.5 1y4y Source: ECB calculations. Latest observation: 12 April 2017. -1.0 2014 2015 2016 2017 Source: ECB. Notes: The forward rates correspond to the OIS rate of the euro area and the US respectively. Latest observation: 12 April 2017. 12 www.ecb.europa.eu Central Rubric bank balance sheets Central bank balance sheets (Monetary policy instruments as percent of GDP) CEPR Recessions Credit easing measures Eurosystem Federal Reserve 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: ECB, Federal Reserve. Latest observation: 14 April 2017. 13 www.ecb.europa.eu Inflation Rubric developments HICP and HICP excluding food and energy (annual percentage changes) HICP HICP excl. food and energy 5 5.0 4 4.0 3 3.0 2 2.0 1 1.0 1.5 0.7 0 -1 2007 0.0 -1.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Eurostat. Last observation: March 2017. www.ecb.europa.eu 14 Rubric Financial sector agenda: Restoring resilience Regulatory initiatives towards a European banking union SSM Regulation BRRD SRM Regulation • Establishes SSM • Supervision of all banks in participating Member States by ECB and NCAs • Framework for resolution of credit institutions and investment firms • Harmonised tools and powers relating to prevention, early intervention and resolution for all EU Member States • Establishes single system for efficient and harmonised resolution of banks within the SSM • Single Resolution Board (SRB) and Single Resolution Fund (SRF) • In force since 3 Nov 2013 • SSM operational since 4 Nov 2014 • In force since 2 Jul 2014 • Applies to MS since 1 Jan 2015 • Bail-in provisions applicable as of 1 Jan 2016 • In force since 19 Aug 2014 • SRF applicable as of 1 Jan 2016 Source: ECB, Annual Report 2014. 15 www.ecb.europa.eu