By Louis de Charsonville and Caroline Jardet

Services price inflation in France stood at 1.0% in 2016, well below its average from 1999 to 2015 (around 2%). This paper looks at the mechanisms through which the fall in oil prices and lower headline inflation have contributed to slowing services prices since mid-2014. An analysis of these interactions suggests that services price inflation will begin to recover as of 2017, to around 2%.

The natural rate of interest is the theoretical real rate at which inflation neither rises nor falls. Determined independently of monetary policy, it is a benchmark to assess whether policy is accommodative or restrictive. It is unobservable but estimated to be negative in the euro area over recent years. With modest inflation expectations and the effective lower bound on nominal interest rates, conventional monetary policy struggled to raise inflation, explaining the ECB’s recourse to non-conventional instruments.

By Sophie Haincourt

According to model simulations, the dollar appreciation in effective terms would have choked 0.2 percentage point (pp) off US growth since mid-2014. Meanwhile, the euro depreciation would have added 0.5pp to Euro Area (EA) growth. But since mid-2015 the euro has been appreciating, dampening growth by 0.2pp. Higher openness of the EA, as well as a larger exposure to emerging economies, could be an explanation.

By S. Avouyi-Dovi with B. Bureau, R. Lecat, Ch. O’Donnell, J.-P. Villetelle

Firms in difficulty benefiting from loans at very low rates, known as "zombies firms", remain rather scarce in France. The share of these firms according to size has been broadly stable over the past decade. In 2014 they accounted for about 2.5% of SMEs and slightly more than 1% of the others (Large Enterprises, Mid-Tier Enterprises and Holdings). One deduction is that zombie loans should not be viewed as one of the key factors impairing labor productivity in France.

According to the Banque de France nowcasting model, global economic growth is likely to increase moderately in 2017: it would expand by 3.3% after 3.0% in 2016. This is in line with the consensus of major international organizations. Since 2011, the International Monetary Fund (IMF) had to revise downwards its global growth projections, but the mid-January update of forecasts brings optimism for global growth this year.

Figure 1: Former global growth forecasts systematically revised downwards Source : IMF

Euro area inflation would have been negative in 2015 and 2016 absent the ECB action since 2014. The impact of this action on inflation, measured by the HICP (Harmonized Index of Consumer Prices), is around +0.3 percentage point (pp) as early as 2015 and +0.8 pp in 2016 according to staff’s estimates of the Eurosystem (the ECB and the 19 national central banks). The cumulated effect on 2015-18 of measures taken in 2014-16 reaches almost +1.6 pp.

Figure 1. Euro area inflation and the estimated effect of monetary policy Note: Inflation is year-on-year percentage change in HICP. The green line represents the realized annual average of inflation. The pink area represents the inflation gain brought by monetary policy.

The ECB unconventional monetary policy has largely succeeded in decoupling nominal interest rates in the euro area from those in the United States since 2014, as warranted by their respective macroeconomic conditions. This has been especially true since the rise in US interest rates after the election of Donald Trump, particularly for rates up to 5 years.

Figure 1: 5 year interest rates (Euro area AAA, US, UK and French treasuries, in %) Sources: Bloomberg and ECB

Over the past five years, global trade and global production have grown at similar rates, whereas before 2008, global trade grew at twice the rate. This slowdown in global trade is largely due to China’s rebalancing towards its domestic demand and its services sector. If we exclude the decline in trade related to increasing protectionism, near-parallel growth for global trade and production is the new “normal.”

By Rémy Lecat with Antonin Bergeaud and Gilbert Cette

Standard of living has slowed continuously over the past decades in most developed economies, mainly due to a productivity slowdown. Have we entered a period of secular stagnation? In fact, many countries still have a significant catch-up potential, even in Europe, but to achieve this catch-up, the implementation of structural reforms is required.

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