Monthly Bulletin July 2009 - Banque de France

ECONOMIC
AND MONETARY
DEVELOPMENTS
The external
environment
of the euro area
financial wealth, and tight credit conditions are likely to continue to weigh on consumer spending
in the near term. Following a slight increase at the beginning of 2009, possibly reflecting a largerthan-expected
pass-through of exchange rate depreciation to consumer prices, annual HICP
inflation again declined to 2.2% in May, down from 2.3% in April. At the same time the Retail
Price Index, which also includes housing goods with a large weight, declined by 1.1% (year on
year), after -1.2% in April. House prices have been falling since the start of the financial crisis in
mid-2007, and the annual change in the Halifax House Price Index was -16.3% in May 2009.
However, the pace of the decline seems to have moderated (in fact, in month-on-month terms, the
Halifax index showed an increase of 2.6% in May). Looking ahead, inflation is expected to decline
further and to fall below the Bank of England’s target of 2%.
Between 5 March 2009 and 11 June 2009, the Bank of England purchased assets in the amount of
GBP 86 billion, which consisted mainly of government bonds. On 4 June 2009 the Monetary Policy
Committee announced its decision to maintain the official Bank Rate paid on commercial bank
reserves at 0.5% and to continue the policy of quantitative easing for two more months, providing
for additional purchases to bring the scale of its programme of asset purchases to a total of
GBP 125 billion.
OTHER EUROPEAN COUNTRIES
In most other non-euro area EU countries, weak economic activity in recent quarters was
accompanied by a decrease in inflation. In Sweden, real GDP contracted by 0.9% (quarter on
quarter) in the first quarter of 2009, amid weak external demand, tighter financing conditions and
declining private consumption. These factors are also dampening economic activity in Denmark,
where output contracted by 1.1% (quarter on quarter) in the first quarter of 2009. Short-term
indicators (e.g. the steep rise in forced sales of real property and the number of bankruptcies in May)
point to continued weakness in economic activity in Denmark. In recent months HICP inflation has
decreased in both countries. In May HICP inflation decreased to 1.7% in Sweden and remained
unchanged at 1.1% in Denmark. On 4 June 2009 Danmarks Nationalbank decided to lower its main
policy rate by 10 basis points to 1.55%.
Turning to the largest central and eastern European EU Member States, in Hungary real GDP
contracted by 2.5% (quarter on quarter) in the first quarter of 2009. Real GDP also declined in the
Czech Republic and Romania, namely by 3.4% and 2.6% respectively quarter on quarter. Economic
activity has held up best in Poland, where quarter-on-quarter growth was still positive at 0.4% in the
first quarter of 2009, on account of the fact that domestic demand growth remained strong compared
with that in other countries in the region. Short-term indicators point to continued weakness in
economic activity in these countries. In May 2009 annual HICP inflation rates decreased in the
Czech Republic, Poland and Romania, to 0.9%, 4.2% and 5.9% respectively. In Hungary, by
contrast, annual inflation increased to 3.8% in May 2009, reflecting mainly the lagged effect of the
currency depreciation. On 24 June 2009 Narodowy Bank Polski decided to reduce its main policy
rate by 25 basis points to 3.5%. On 30 June 2009 Banca Naţională a României decided to reduce its
main policy rate by 50 basis points to 9%.
EMERGING ASIA
According to the latest monthly indicators, the pace of decline in economic activity slowed
considerably in most emerging Asian economies in the second quarter of 2009. In particular, the
most recent trade data point to positive monthly changes in several countries, thus suggesting that
the collapse of trade that has affected the region so severely may be coming to an end. Although
the lagged negative effects of the global crisis, such as rising unemployment, are holding back
ECB
Monthly Bulletin
July 2009
11