Theeuroarea

outlook

SeminarattheEconomic

andSocialResearch

Institute,Dublin

20December2023

PhilipR.Lane

MemberoftheExecutiveBoard

December2023Eurosystemstaffprojections:assumptions

1

December2023

Revisionsvs.

September2023

202320242025

2023

2024

2025

2026

Oilprice(levelinUSD)

84.0

80.1

76.5

73.6

1.6

-2.1

-1.7

Oilprice(levelineuro)

77.8

73.9

70.6

67.9

2.4

-1.2

-0.8

Naturalgasprice(EUR/MWh)

41.5

47.4

44.2

36.9

-3.2

-12.6

-6.9

Wholesaleelectricityprice(EUR/MWh)

105.0

116.5

110.8

97.7

-8.8

-18.3

-10.1

Effectiveexchangerate(index1999Q1=100)

121.9

123.5

123.5

123.5

-0.9

-1.1

-1.1

USDperEUR(level)

1.08

1.08

1.08

1.08

-0.69

-0.88

-0.88

3-monthinterestrate(%p.a.)

3.4

3.6

2.8

2.7

0.0

-0.1

-0.3

10-yearbondyield(%p.a.)

3.2

3.2

3.3

3.5

0.0

-0.1

0.0

Stockprice(level)

451

455

458

459

-0.7

-0.9

-1.3

Note:Revisionsareexpressedaspercentagesforlevelsandpercentagepointsforinterestratesandbondyields.

December2023Eurosystemstaffprojections:baseline

2

December2023

Revisionsvs.September2023

(annualpercentagechanges)

(percentagepoints)

202320242025

2026

202320242025

HICP

5.42.72.1

1.9

-0.2-0.50.0

HICPexcl.energyandfood

5.02.72.3

2.1

-0.1-0.20.1

Compensationperemployee

5.34.63.8

3.3

0.00.30.0

Unitlabourcosts

6.14.12.6

2.0

0.30.60.2

RealGDP

0.60.81.5

1.5

-0.1-0.20.0

Privateconsumption

0.51.41.6

1.4

0.2-0.20.0

Governmentconsumption

0.11.11.3

1.2

0.20.0-0.1

Totalinvestment

1.30.41.8

2.1

-0.40.80.4

Unemploymentrate(%oflabourforce)

6.56.66.5

6.4

0.0-0.1-0.2

December2023

Revisionsvs.September2023

(Q4-on-Q4percentagechanges)

(percentagepoints)

23Q424Q425Q4

26Q4

23Q424Q425Q4

HICP

2.82.62.0

1.9

-0.5-0.30.1

HICPexcl.energyandfood

3.82.72.1

2.1

-0.30.20.0

Compensationperemployee

4.74.63.5

3.1

0.00.10.4

Unitlabourcosts

5.53.62.3

1.9

0.50.40.5

RealGDP

0.31.31.5

1.5

-0.2-0.10.0

Privateconsumption

0.61.81.4

1.4

0.1-0.10.0

Governmentconsumption

-0.31.91.0

1.3

0.10.4-0.3

Totalinvestment

1.20.42.2

2.0

-0.31.2-0.1

Unemploymentrate(%oflabourforce)

6.56.66.5

6.3

0.0-0.1-0.2

Note:Revisionscalculatedbasedonroundedfigures.

3

Privateconsumption

Goodsandservices

consumption

(index:2019=100)

Total

Durables

Non-durables

Services

102

101

100

99

98

23Q1

23Q3

23Q2

Sources:Eurostat,DG-ECFINandECBcalculations.

Notes:ThecountrycoverageforthefiguresinQ32023is95%.Non-durablegoodsincludesemi-durableones.

Latestobservation:Q32023.

Demandexpectations

(standardisedpercentagebalances)

Contact-intensiveservices

Services

Retailtrade

Majorpurchases

2

1

0

-1

-2

Jan-23Apr-23Jul-23Nov-23

Sources:Eurostat,DG-ECFINandECBcalculations.

Notes:Dataarestandardisedoverpre-COVIDperiod.Thechartshowsdemandexpectationsoffirmsovernext3months.

Latestobservation:November2023.

Outlookforprivateconsumption

(annualpercentagechanges,percentagepoint

contributions)

Consumerprices

Savings

Disposableincome

Realprivateconsumption

10

5

0

-5

-10

2023202420252026

Source:December2023Eurosystemstaffprojections.

Note:ConsumerpricesrefertotheHICPinflation.

4

Investment

Housinginvestment

(quarter-on-quarterpercentagechanges,quarterlyaverageofdiffusionindex)

Housinginvestment

ECbuildingactivityoverlast3months(rhs)PMIhousingconstructionactivity(rhs)

2

1

0

-1

-2

-3

60

55

50

45

40

35

22Q122Q323Q123Q323Q4

Sources:Eurostat,S&PGlobalandDG-ECFIN.

Note:TheEuropeanCommission(EC)indicatorisstandardisedandrescaledtohavethesamemeanandstandarddeviationasthePurchasingManagersIndex(PMI).

Latestobservations:Q32023forhousinginvestment;November2023forPMIandEC.

Businessinvestment

(quarter-on-quarterpercentagechanges,

deviationfrommean)

3

2

1

0

-1

-2

Businessinvestment

PMIoutstandingbusiness(rhs)

PMIneworders(rhs)

ECsurvey(rhs)

30

20

10

0

-10

-20

22Q122Q323Q123Q323Q4

Sources:Eurostat,S&PGlobalandDG-ECFIN.

Notes:BusinessinvestmentexcludesIrishintellectualpropertyproducts(IPP).TheEuropeanCommission(EC)seriesistheindustrialconfidenceindicatorforcapitalgoods.

Latestobservations:Q32023forinvestment;November2023forPMIandEC.

Outlookforinvestment

andunitprofits

(annualpercentagechanges)

Investment

Unitprofits

6

4

2

0

-2

2023202420252026

Source:December2023Eurosystemstaffprojections.

5

Labourmarkets

Employmentandunemploymentrate

(quarter-on-quarterpercentagechanges,

percentagesofthelabourforce)

PMIemployment

(diffusionindex)

0.6

0.5

0.4

0.3

0.2

0.1

0.0

EmploymentUnemployment(rhs)

23Q123Q223Q323Q4202420252026

6.7

6.6

6.5

6.4

6.3

6.2

6.1

Sources:Eurostat,December2023EurosystemstaffprojectionsandECBcalculations.

Note:Solidbarsarequarterlydata(andprojectionsforQ42023),shadedbarsareannualprojections.

Latestobservations:Q32023foremploymentandOctober2023forunemploymentrate.Theverticallineindicatesthebeginningoftheprojections.

Construction

Services

Composite

Manufacturing

56

54

52

50

48

46

56

54

52

50

48

46

Jan-23Apr-23Jul-23Oct-23Dec-23

Source:S&PGlobal.

Latestobservation:December2023forcomposite,manufacturingandservices,andNovember2023forconstruction.

6

Inflationoutlook

HICPinflationandcomponents

(annualpercentagechanges,percentagepointcontributions)

Food

Energy

HICPX

HICP

12

10

8

6

4

2

0

-2

Jan-22Jul-22Jan-23Jul-23Nov-2323Q424Q425Q426Q4

Sources:Eurostat,December2023EurosystemstaffprojectionsandECB

calculations.

Notes:Thecut-offdatefortechnicalassumptionswas23November2023.The

macroeconomicprojectionsfortheeuroareawerefinalisedon30November2023.

TheHICPestimateforNovember2023wasincludedintheprojections.

HICPinflationandcomponents:revisionscomparedtoSeptember

(percentagepoints)

Food

Energy

HICPX

HICP

0.2

0.0

-0.2

-0.4

-0.6

-0.8

23Q324Q124Q325Q125Q3

Sources:Eurostat,December2023EurosystemstaffprojectionsandSeptember2023ECBstaffprojections.

Notes:Thecut-offdatefortechnicalassumptionswas23November2023.Themacroeconomicprojectionsfortheeuroareawerefinalisedon30November2023.TheHICPflashestimateforNovember2023wasincludedintheprojections.

7

2

0

-2

-4

-6

-8

Headlineinflationandinflationmomentum

Headlineinflationvis-à-visNov2022

(percentagepoints)

EnergybaseeffectsFood

Energyexcl.baseeffects

Core

HICP

InflationmomentumforHICPandsub-

components

(annualised3-month-on-3-monthpercentagechanges)

HICP

Food

Energy(rhs)

HICPX

Goods

Services

Nov-22Feb-23May-23Aug-23Nov-23

Sources:EurostatandECBcalculations.

Latestobservation:November2023.

14

12

10

8

6

4

2

0

40

30

20

10

0

-10

-20

-30

7

6

5

4

3

2

1

0

Jan-23May-23Nov-23

Jan-23May-23Nov-23

Sources:EurostatandECBcalculations.

Notes:Basedonseasonallyadjusteddata.Thebrokenredlinecorrespondstoservicesadjustedfortheeffectsofthe€9and€49ticketsintroducedinGermanyinJune2022andMay2023,respectively.

Measuresofunderlyinginflationandimpactofmonetarypolicy

Measuresofunderlyinginflation

(annualpercentagechanges)

HICPX

HICPXX

Domestic

HICPexcl.unprocessedfoodandenergy

HICPexcl.energySupercore

PCCI

PCCIexcl.energy

ImpulseresponsestomonetarypolicyshocksbysensitivityofHICPXitems

(cumulativepercentagechanges)

Highlysensitive

Moderatelysensitive

StandardmeasuresAdjustedmeasures

8

7

6

5

4

3

2

1

0

8

7

6

5

4

3

2

1

0

Jan-22Jul-22Jan-23Nov-23Jan-22Jul-22Jan-23Nov-23

Sources:EurostatandECBcalculations.

Notes:The‘a(chǎn)djusted’measuresabstractfromenergyandsupply-bottleneckshocksusingalargeSVAR,seeBańbura,M.,Bobeica,E.andMartínez-Hernández,C.(2023),

“Whatdrivescore

inflation?Theroleofsupplyshocks

”,WorkingPaperSeries,No2875,ECB.

Latestobservations:November2023.

8

0.5%

0.0%

-0.5%

-1.0%

-1.5%

05101520

Sources:ECBcalculations.

Notes:Impulseresponsesacrosshighlysensitiveandmoderatelysensitiveitemsareaweightedaveragebasedonthemonetarypolicyresponsivenessofthe73HICPXitemstoa25bp(tightening)shock,aftercontrollingforlagsofthedependentvariable,moneymarketrates,industrialproduction,astockmarketindex,producerprices,oilpricesandthenominaleffectiveexchangerate.Itemsareclassifiedaccordingtotheirindividualresponsivenessrelativetothemedianacrossallitemswithasignificant(negative)response.Impulseresponsesarebasedonsmoothlocalprojections(asinBarnichonandBrownlees,2019)usingtheproxyformonetarypolicyshocksbyJarocinskiandKaradi(2020).Estimationsamplespansfrom1999uptoSeptember2023.Thex-axisshowsmonthsaftertheshock.

9

Food,goodsandservicesinflation

Food

(annualpercentagechanges)

HICPfood

PCCIfood

PPIfood

IPPIforfood(Oct23)

28

24

20

16

12

8

4

0

-4

Jan-21Jan-22Jan-23Jan-24

Goods

(annualpercentagechanges)

HICPNEIG

PCCINEIG

PPInon-foodconsumergoodsIPPIforNEIG(Oct23)

14

12

10

8

6

4

2

0

-2

Jan-21Jan-22Jan-23Jan-24

Services

(annualpercentagechanges)

Services

PCCIservices

Contact-intensiveservices

Sellingpriceexpectations

(shareoffirmsexpectinglower/higherprices,

deviationfrompre-COVIDaverage)

Lower(manufacturing) Higher(manufacturing)Lower(services)

10

8

6

4

2

0

-2

Notcontact-intensiveservices

50

40

30

20

10

0

-10

Higher(services)

Jan-21Jan-22Jan-23Nov-23Jan-21Jan-22Jan-23Nov-23

Sources:Eurostat,DG-ECFINandECBcalculations.

Notes:IPPIstandsforindicatorofproducerpricepressures,seetheboxentitled

"Indicatorsforproducerpricepressuresinconsumergoodsinflation

",EconomicBulletin,Issue3,ECB,2023

Rubene(2023)

;thegreybarsshowthe95%confidenceinterval.Contact-intensiveservicesrefertowholesaleandretailtrade,transport,accommodationandfoodservices.Notcontact-intensiveservicescoverinformationandcommunication,financialandinsuranceactivities,realestate,professionalandadministrativeactivities.Threemonthsaheadsellingpriceexpectationsdataareseasonallyadjustedandexpressedasaveragedeviationfrompre-pandemiclevels.

Latestobservations:November2023forHICP,Services,PCCIandsellingpriceexpectations;October2023fortherest.

23Q1

23Q2

23Q3

23Q4

2024

2025

2026

23Q1

23Q2

23Q3

23Q4

2024

2025

2026

OutlookforwagesandtheGDPdeflator

Compensationperemployee

(annualpercentagechanges,percentagepoint

contributions)

Wagedrift-otherfactors

Wagedrift-impactofaveragehoursworked

Socialsecuritycontributions

Negotiatedwagesgrowth

Compensationperemployeegrowth

6

5

4

3

2

1

0

-1

Sources:Eurostat,ECB,December2023EurosystemstaffprojectionsandECBcalculations.

Notes:DiamondsshowtheDecember2023Eurosystemprojectionsforcompensationperemployeegrowth.Latestobservation:Q32023.

Wagetracker

(annualpercentagechanges)

CPEDecember2023BMPE

ECBwagetrackerincl.one-offs

ECBwagetracker-latestagreementsincl.one-offsIndeedwagetracker

Negotiatedwagesincludingone-offs

6.5

6.0

5.5

5.0

4.5

4.0

3.5

3.0

Jan-23Jul-23Jan-24Jul-24Dec-26

Sources:CalculatedbasedonmicrodataonwageagreementsprovidedbyDeutscheBundesbank,BancodeEspa?a,theDutchemployerassociation(AWVN),OesterreichischeNationalbank,BankofGreece,Bancad’ItaliaandBanquedeFrance.

Notes:EAaggregatebasedonES,IT,GR,AT,DE,NL,FRasofNovember2023.Theindicatorofthelatestwageagreementsshowsthewagegrowthimpliedbyagreementsreachedinaquarterfor12monthsahead.Indeedtrackermeasureswagegrowthinonlinejobads,computedbytheCentralBankofIreland.

Latestobservations:Q32023fornegotiatedwages;November2023forIndeedandECBwagetracker;Q42023forlatestagreements.

GDPdeflator

(annualpercentagechanges,percentagepoint

contributions)

7

6

5

4

3

2

1

0

-1

Unitlabourcosts

Unitprofits

Unitnettaxes

GDPdeflator

Sources:Eurostat,December2023EurosystemstaffprojectionsandECBcalculations.

Notes:Unittaxesreflecttaxesminussubsidies.Whenthecontributionofsubsidiesonproductsislargerthanthecontributionofindirecttaxes,theunittaxcontributionturnsnegative.

Latestobservation:Q32023.

11

Inflationexpectations

Consumerinflationexpectations

(annualpercentagechanges)

SMAinflationexpectations

(annualpercentagechanges)

Inflationexpectationsoneyearahead,median

Inflationexpectationsthreeyearsahead,median

Perceptionofpastinflation,median

10

9

8

7

6

5

4

3

2

1

Jan-22Jul-22Jan-23Jul-23Oct-23

Source:ECBCES.

Latestobservation:October2023.

2024

2026

2023

2025

7

6

5

4

3

2

1

Jan-22Jul-22Jan-23Jul-23Dec-23

Source:ECBSMA.

Note:Thechartshowsthemedianvalues.

Latestobservation:December2023.

12

Risk-freeratesandtherealratecurve

€STRforwardcurveandsurvey

expectationsontheDFR

(percentagesperannum)

4.5

4.0

3.5

3.0

2.5

2.0

1.5

€STRforwardcurveadjustedfortermpremia(latest)€STRforwardcurve(latest)

€STRforwardcurve(preOctGovC-25Oct23)Realised€STR

SMAmedian(Dec23)

SMA25th-75thpercentiles

202320242025

Sources:Refinitiv,Bloomberg,andECBcalculations.

Notes:ThebarsdepictthemedianofresponsestotheDecemberSMAonexpectationsoffuturedepositfacilityrates.Surveysareadjustedforan€STRvs.DFRspread.ModelestimatesarebasedonthreevariationsofJoslin,SingletonandZhu(2011):anaffinetermstructuremodelwithoutsurveyinformationoninterestrateexpectations,andanaffineandalowerboundtermstructuremodel,bothincorporatingsurveyinformationoninterestratesexpectations.

Latestobservation:15December2023.

Realyieldcurve

(percentagesperannum)

Realyieldcurve(latest)

Realyieldcurve(Dec2021)

2

1

0

-1

-2

-3

-4

-5

2

1

0

-1

-2

-3

-4

-5

1Y2Y3Y4Y5Y6Y7Y8Y9Y10Y

Sources:Bloomberg,RefinitivandECBcalculations.

Notes:TherealyieldcurveiscomputedasthedifferencebetweenOISandILSratesateachmaturity.ThecurveforDecember2021refersto31December2021.

Latestobservations:15December2023.

13

Moneyandcredittofirmsandhouseholds

Sourcesofmoneycreation

(averagemonthlyflows,EURbillons)

150

100

50

0

-50

-100

-150

Othercounterparts

Banklong-termfunding(-)

Bankcredittogovernments

Eurosystempurchases

Netexternalmonetaryflows

nstofirmsandhouseholds

22Q1

22Q2

22Q3

22Q4

23Q1

23Q2

23Q3

Oct23

Sources:ECB(BSI)andECBcalculations.

Note:FiguresforM3areadjustedfortheoperationalincidentinTARGET2whichinflatedtheSeptember2022figuresforOFIdepositsandloans,reversingtheminOctoberandNovember2022.

Latestobservations:October2023.

Netdebtfinancingflowsofeuroareafirms

(averagemonthlyflows,EURbillions)

Netissuanceofdebtsecurities

Borrowingfrombanks

50

25

0

-25

222222222323JulAugSepOctQ1Q2Q3Q4Q1Q223232323

Sources:ECB(BSIandCSEC)andECBcalculations.

Notes:MFIloansareadjustedforsalesandsecuritisation.Theseasonaladjustmentforthenetissuanceofdebtsecuritiesisnotofficial.

Latestobservation:October2023.

Bankloanstohouseholdsby

purpose

(averagemonthlyflows,EURbillions)

Otherlending

Creditforconsumption

Loansforhousepurchase

30

20

10

0

-10

222222222323JulAugSepOctQ1Q2Q3Q4Q1Q223232323

Sources:ECB(BSIandCSEC)andECBcalculations.

Notes:MFIloansareadjustedforsalesandsecuritisation.Forthebreakdownitemsofloanstohouseholds,thisadjustmentisindirectlytreatedforseasonality,withthedifferencebetweenthesumofbreakdownsandthetotalattributedtoloansforhousepurchase.

Latestobservation:October2023.

14

Bankfundingcostandcostofbankborrowing

Compositebankfundingcosts

(percentagesperannum)

6

5

4

3

2

1

0

-1

6

5

4

3

2

1

0

-1

Depositrates

Bankbondyields

Compositebankfundingcosts

Compositebankfundingcosts(includinginterbank

borrowing)

2011201520192023Jan-22Jan-2315-Dec-23

Sources:ECB(BSI,MIR,MMSR),IHSMarkitiBoxxandECBcalculations.

Notes:Dailybankbondyields.Fundingcostsaretheaverageofthecostsofdepositsandbankbondsweightedbyoutstandingamounts.Costofdepositsarenewbusinessdepositratesfornon-financialprivatesector.Interbankmoneymarketborrowingistheweightedaverageofsecuredtransactions(beforeJuly2016;proxiedbytheGCpoolingrate).Moneymarketratesaresmoothedforend-ofmontheffects.

Latestobservation:October2023formonthlydata;15December2023fordailydata.

Costofborrowingforfirms

(percentagesperannum)

EADEESFRIT

6

5

4

3

2

1

Jan-22Aug-22Mar-23Oct-23

Source:ECB(MIR).

Note:Theindicatorforthetotalcostofborrowingforfirmsiscalculatedbyaggregatingshort-termandlong-termratesusinga24-monthmovingaverageofnewbusinessvolumes.

Latestobservation:October2023.

Costofborrowingfor

householdsforhousepurchase

(percentagesperannum)

EADEES