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EFN Report Winter 2018/19: Economic Outlook for the Euro Area in 2019 and 2020

EFN Reports, Nr. 1, 2019
Abstract
• The cyclical upswing of the world economy comes to an end, since expansionary policies in the US are expected to peter out in 2019, and the protectionist course of the US government clouds the perspectives for world trade. • However, if a major trade conflict can be avoided, chances are good that world production growth will be close to the long-run average of a bit more than 3%, with trade expanding at a similar pace. • Slowing exports, in particular to China, can partly explain the setback, while domestic conditions still appear favourable: firms continued hiring, albeit by less than before, tight labour markets in many member countries have caused wages to rise more quickly, and house prices continue to increase markedly. • Since a trend to higher inflationary dynamics is still not detectable, the ECB is likely to either keep key interest rates unchanged in 2019 or raise them very carefully at the end of the year. • All in all, we expect the euro area growth rate to come down from 1.9% in 2018 to 1.5% in 2019 and 1.8% in 2020, and inflation to slightly slow down from 1.8% in 2018 to 1.6% in 2019 and 1.5% in 2020.
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EFN Report Summer 2018: Economic Outlook for the Euro Area in 2018 and 2019

EFN Reports, Nr. 3, 2018
Abstract
• In summer 2018 the cyclical upswing of the world economy is not over, but it appears to be fragmenting. While economic activity in the European Union has lost steam, the upswing in the US has gained pace, and growth in China appears to be robust. • Markets for commodities as well as for capital are at present strongly affected by political movements: oil prices are more than 50% higher than one year ago, as the US exit from the Iran nuclear deal puts the long run oil supply from Iran at risk, and the strongly expansionary US tax reform explains the rise in US long run interest rates. . • Uncertainties about the future international trade system cause firms to slow down or even reverse the globalization of value chains. As an early consequence, world trade in the second half of 2018 and in 2019 will expand at much slower rates than during 2017. • In the euro area growth slowed in the first quarter 2018, due to weaker investment activity in France and Italy and, more importantly, a fall in exports in all larger euro area economies except Spain. However, the drivers of the upswing such as low interest rates for credit and expanding real incomes will still be supportive in the near future, and fiscal policies will be slighly more expansionary. But a slowdown in world trade will dent export growth as well as corporate profits. All in all, we expect GDP growth in the euro area to go down from 2.4% in 2017 to 2.1% in 2018 and to 1.7% in 2019 – a forecast that will only be realized if damages to the international trade system are limited and if the European sovereign debt crisis does not come back. • While wage inflation has been slowly increasing during the past quarters to about 2%, a clear upwards trend of core consumer price inflation is still not detectable. The recent jump of the headline rate to 1.9% is due to higher oil prices. Our forecasts for 2018 and 2019 are close, although still below, 2%.
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EFN Report Autumn 2017: Economic Outlook for the Euro Area in 2017 and 2018

EFN Reports, Nr. 4, 2017
Abstract
In 2017 the world economy is in an upswing, but consumer price inflation is still surprisingly low in advanced economies, and central banks will therefore keep key interest rates very low and financial conditions favorable for the rest of the year and, probably, for 2018. Global growth, though, will moderate a bit, since expansive policy measures in China have been reduced. As an early consequence, imports of emerging Asia were no more than stagnant during summer. The upswing in the euro area is broad based, both regionally and with respect to the different components of aggregate demand, as investment has recently picked up markedly, partly due to construction of dwellings. From the production side, the level of capacity utilization in the manufacturing sector is clearly above its long-term average and rising further. Inflation will not have reached the ECB’s target rate of below but close to 2% at the end of 2018. The trend of a growing participation rate in labour markets and the amount of part-time and low quality jobs are some reasons why overall wage and price dynamics are still very moderate; the appreciation of the euro, the incorporation of technical innovations and a possible change in the consumer preferences for low-cost products could be other reasons. We forecast a GDP growth rate of 2.3% for 2017 and 1.9% for 2018. This year’s strong pickup of world trade means that net exports will, in spite of rather strong domestic demand, contribute positively to GDP growth in 2017, while the opposite holds for 2018, due to the significant appreciation of the Euro.
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Inflation Dynamics During the Financial Crisis in Europe: Cross-sectional Identification of Long-run Inflation Expectations

Geraldine Dany-Knedlik, Oliver Holtemöller
IWH Discussion Papers, Nr. 10, 2017
Abstract
We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
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EFN Report Spring 2017: Economic Outlook for the Euro Area in 2017 and 2018

EFN Reports, Nr. 2, 2017
Abstract
Global economic activity appears to be expanding rapidly during spring 2017. Confidence among managers is either strong or has improved in all major regions, and world trade and industrial production have, after two years of weakness, picked up markedly during last winter. For 2 ½ years, the euro area economy has now been constantly expanding at an annual rate of about 1.6%, slightly above potential. Employment has also been expanding steadily. Production and employment have been recently rising almost everywhere, including countries such as France and Italy where unemployment rates still do not appear to be on a downward trend. Official investment data for 2015 and 2016 appear to be distorted: big multinational firms relocated parts of their assets (intellectual property products in particular) or their registered business offices from countries outside the euro area to Ireland. As a consequence, reported gross fixed capital formation in Ireland expanded by 33% in 2015 and by 45% in 2016. Without this effect, investment growth in the euro area is about one percentage point lower in 2015 and 2016. Headline inflation hit 2% in February, but this was only the effect of higher world oil prices. The core rate is stubbornly at slightly below 1%, and wages rise annually by scarcely 1.5%. The revival of the economy will have to continue for considerably more time until inflation will come close to the ECB target zone. As monetary conditions continue to support growth, financial policies will be slightly expansive, and a certain external stimulus should come from the apparent recovery of world trade. Overall, we forecast euro area GDP to expand by 1.7% in both 2017 and 2018. However, policy uncertainty is substantial and could have a negative effect. In particular, elections in member states might give power to movements that aim at disintegrating Europe. Such a turn could rapidly undermine confidence, in particular in the financial strength of highly indebted member states.
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12.04.2017 • 19/2017

Gemeinschaftsdiagnose Frühjahr 2017: Aufschwung festigt sich trotz weltwirtschaftlicher Risiken

Die deutsche Wirtschaft befindet sich nun schon im fünften Jahr eines moderaten Aufschwungs. Die gesamtwirtschaftliche Kapazitätsauslastung nimmt allmählich zu, und die gesamtwirtschaftlichen Produktionskapazitäten dürften mittlerweile die Normalauslastung leicht überschritten haben. Davon gehen die an der Gemeinschaftsdiagnose beteiligten Wirtschaftsforschungsinstitute in ihrem Frühjahrsgutachten für die Bundesregierung aus. Die konjunkturelle Dynamik bleibt dabei im Vergleich zu früheren Aufschwungphasen gering, auch weil der wenig schwankungsanfällige Konsum die Hauptantriebskraft ist. Einer stärkeren Kapazitätsanspannung wirkt zudem entgegen, dass die Nettozuwanderung das Produktionspotenzial erhöht. „Das Bruttoinlandsprodukt dürfte in diesem Jahr um 1,5% (kalenderbereinigt 1,8%) und im kommenden Jahr um 1,8% zulegen. Die Arbeitslosenquote dürfte nach 6,1% im Jahr 2016 auf 5,7% im Jahr 2017 und 5,4% im Jahr 2018 sinken“, so Oliver Holtemöller, Leiter der Abteilung Makroökonomik und Vizepräsident des Leibniz-Instituts für Wirtschaftsforschung Halle (IWH). Nach einem Anstieg der Verbraucherpreise von nur 0,5% im Jahr 2016 werden im Prognosezeitraum mit 1,8% im Jahr 2017 und 1,7% im Jahr 2018 wohl wieder merklich höhere Raten erreicht. Die öffentlichen Haushaltsüberschüsse gehen etwas zurück; das Finanzgebaren der öffentlichen Hand ist im laufenden Jahr leicht stimulierend und im kommenden Jahr konjunkturneutral ausgerichtet.

Oliver Holtemöller
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29.09.2016 • 40/2016

Gemeinschaftsdiagnose im Herbst 2016: Deutsche Wirtschaft gut ausgelastet – Wirtschaftspolitik neu ausrichten

Die deutsche Wirtschaft befindet sich in einem moderaten Aufschwung, der von einem stabilen Arbeitsmarkt und kräftigen Konsum gestützt wird. Davon gehen die an der Gemeinschaftsdiagnose beteiligten Wirtschaftsforschungsinstitute aus. Das Bruttoinlandsprodukt wird demnach im nächsten Jahr um 1,4 Prozent und im Jahr 2018 um 1,6 Prozent wachsen. Für das laufende Jahr wird ein Wachstum von 1,9 Prozent erwartet, so die von der Bundesregierung in Auftrag gegebene Gemeinschaftsdiagnose. Im Frühjahr gingen die Institute noch von einem Wachstum von 1,6 Prozent für dieses und 1,5 Prozent für nächstes Jahr aus.

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EFN Report Autumn 2015: Economic Outlook for the Euro Area in 2015 and 2016

European Forecasting Network Reports, Nr. 4, 2015
Abstract
For the end of this year and for 2016, chances are good that production in advanced economies will continue to expand a bit faster than at trend rates, while growth dynamics in emerging markets economies will not strengthen or even continue to decrease. Since autumn 2014, production in the euro area expands at an annualized rate of about 1.5%. The recovery appears to be broad based, with contributions from private consumption, exports, and investment into fixed capital, although it fell back in the second quarter after a strong increase at the beginning of the year. From a regional perspective, the recovery is as well quite broad based: production is expanding in almost every country, surprisingly and according to official data, including Greece. Structural impediments still limit the ability of the euro area economy to grow strongly: firms and, in particular, private households are only slowly reducing their heavy debt burdens. According to our forecasts, the euro area GDP will grow by 1.6% in 2015 and by 1.9% in 2016. The high increase in the number of refugees in 2015 will, in principle, positively affect private as well as public consumption, but the effect should be below 0.1 percentage points relative to GDP. Our inflation forecast for 2015 is 0.1%. For 2016, we expect that inflation will increase to 1.3%, which is still below the ECB’s target of 2%.
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Evidence on the Effects of Inflation on Price Dispersion under Indexation

Juliane Scharff, S. Schreiber
Empirical Economics, Nr. 1, 2012
Abstract
Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of non-optimized prices, those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative price or inflation variability, RPV). Using US sectoral price data, we estimate such a relationship between inflation and RPV, also taking into account the endogeneity of inflation by using two- and three-stage least-squares and GMM techniques, which turns out to be relevant. We find an effect of (expected) inflation on RPV, and our results indicate that average (“trend”) inflation is important for the RPV-inflation relationship. Lagged inflation matters for indexation in the CPI data, but is not important empirically in the PPI data.
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Evidence on the effects of inflation on price dispersion under indexation

Juliane Scharff, S. Schreiber
IMK Working Paper, No. 12/2008, 2008
Abstract
Die verzerrenden Auswirkungen von Inflation auf relative Preise sind das Hauptargument für Inflationsstabilisierung in Makromodellen mit Preisrigiditäten. Bei Indexierung von nicht optimierten Preisen implizieren diese Modelle einen nichtlinearen und dynamischen Einfluss von Inflation auf die Preis-Streuung im Querschnitt (relative Preisvariabilität, RPV). Wir schätzen eine verallgemeinerte Form dieser theoretischen Beziehung zwischen Inflation und RPV mit US-Daten. Wir bestätigen den Einfluss von Inflationsschwankungen, jedoch finden wir bisher vernachlässigte Endogenitätsverzerrungen, und unsere IV- und GMM-Schätzungen zeigen, dass die durchschnittliche (“Trend-“) Inflation bei der Indexierung signifikant ist. Die verzögerte Inflationsrate ist weniger wichtig.
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