Following our update in May 2024, we want to report on the progress made by the Inclusive Framework on BEPS (IF) in the development of a final package for Pillar One of the Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy agreed in October 2021. This package includes two components: a text of the Multilateral Convention (MLC) to implement Amount A and a framework for Amount B.
Amount A
Amount A introduces a system for a coordinated allocation of taxing rights to market jurisdictions with respect to a defined portion of the residual profits of the largest and most profitable MNEs. It is designed to be a sustainable, coordinated reform of the international tax system that responds to the tax challenges arising from the digitalisation of the economy, reinforces stability and certainty for taxpayers, and provides for the withdrawal and standstill of Digital Services Taxes (DSTs) and Relevant Similar Measures (RSM) with respect to all companies.
After several years of negotiations within an Inclusive Framework consisting of more than 140 members, as well as numerous consultations with stakeholders, we were able to release in October 2023 a text of the MLC, along with the accompanying Explanatory Statement (ES) and the Understanding on the Application of Certainty for Amount A of Pillar One (UAC), which reflected the significant progress achieved at that time and indicated in footnotes the handful of specific issues where different views remained between members.
Further negotiations in the first half of 2024, informed by feedback from domestic consultations following the release of the text, led to the successful resolution of the issues standing in the way of adoption of the text. (1) Specifically, the MLC text was revised to:

Clarify the definition of DSTs and RSMs, including with respect to the application of the de facto ring-fencing criteria;
Provide an election for common application of the MLC to a non-State jurisdiction and the State responsible for its international relations, subject to certain guardrails and measures to limit the additional elimination of double tax obligations that might fall on other States as a result of such an election; and
Provide further modifications within the Marketing and Distribution Profit Safe Harbour (MDSH) when calculating the excess profit of a Multinational Enterprise in a market jurisdiction with lower income levels, including a higher return on revenue (ROR) metric and higher deductions (so-called “reduction factors”) within the withholding tax upward adjustment mechanism.

In June, the revised MLC text was submitted to the Inclusive Framework for adoption. Members were informed that, in line with international law, agreement to adopt the final text does not create an obligation to sign it, with the decision to sign the text being a separate decision for jurisdictions and one that might follow specific domestic procedures. Only one member objected to the text’s adoption, citing the absence of consensus having been reached on the Amount B Framework, as set out below, and citing the fact that another member’s agreement to the adoption of the text was accompanied by a reservation on whether or not it would sign as a result of it not being in a position to support certain aspects. The text has remained stable since that point with the negotiations having been focused on resolving the outstanding issues with the Amount B Framework.
Amount B
Amount B is a simplified and streamlined approach to the application of the arm’s length principle to baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries.
In February 2024, an optional Amount B was incorporated into the OECD Transfer Pricing Guidelines (“TPG”) allowing jurisdictions, including non-IF members, to elect to implement the simplified and streamlined approach to baseline marketing and distribution activities in their jurisdiction. Members of the IF also made a commitment to respect outcomes determined under that approach where the approach is applied by “covered jurisdictions”, in recognition of their particular needs and challenges – in some covered jurisdictions, Amount B is expected to address between 30-70% of all current transfer pricing disputes.
Building on that optional model, discussions have continued on a framework under which jurisdictions that become parties to the MLC would, from the point the MLC enters into effect, be required to apply Amount B to local taxpayers performing in-country baseline marketing and distribution activities where the transaction is covered by an income tax treaty in force with another IF member jurisdiction that is also a Party to the MLC. Jurisdictions would also be required to respect outcomes determined under Amount B when applied by other parties to the MLC with which an income tax treaty is in force (the “Amount B Framework”).
While acknowledging the significant tax certainty benefits already provided to in-scope groups through the MLC – including the availability of robust binding dispute resolution for a broad range of related transfer pricing and profit attribution disputes and a framework for the withdrawal and standstill of DSTs and RSMs – some members have taken the position that the Amount B Framework is an essential part of the overall Pillar 1 package.
Significant work has been undertaken on the detailed parameters of the Amount B Framework with only a few outstanding issues remaining amongst certain jurisdictions, as follows:
a. How to appropriately reflect the interdependence between the MLC and Amount B;
b. The detailed terms of an agreed filter designed to screen out jurisdictions that account for a low number of disputes relating to transactions of the type that Amount B is intended to address;
c. The terms of an Optional Qualitative Test that certain jurisdictions have argued is needed, in addition to the existing filters, to ensure that above-baseline transactions expected to generate benefits that significantly exceed those typically derived from core distribution functions do not fall within scope; and
d. How to address the concerns of certain jurisdictions that consider that the pricing matrix delivers inappropriate outcomes for taxpayers performing baseline marketing and distribution activities in their respective jurisdictions.
Discussions on the first three items are generally well advanced, with the focus of those discussions now being on procedural questions and/or the contours of tests and their precise drafting. With respect to the fourth item, various solutions have been put forward to bridge the different positions of IF members, including a solution that would allow the concerned IF members to limit the application of Amount B to distributors generating revenues below a threshold, with an alternative fast-track early certainty mechanism made available for distributors generating revenues above it. (2) Despite constructive discussions on these solutions, we have yet to find a path forward that has the support of all members, and our focus remains on how outstanding concerns can be addressed as a part of a solution that is able to achieve consensus.
We would like to commend all IF members for their continued dedication and willingness to compromise in progressing Pillar One to this stage. We remain committed to do our utmost to help bridge the last few remaining issues relating to the Amount B Framework in order to secure IF agreement on the Pillar One package and remain committed to ensuring that the IF is prepared to support swift implementation once that agreement is reached.
 
Notes:
1 Adoption is the formal act through which the form and content of a treaty is established.
2 This solution would also allow for bilateral framework agreements to be entered into between jurisdictions as an alternative.
 
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By Srinivas Gurazada | Historically, accountants have been perceived as mere ‘bookkeepers’ who record vouchers and prepare budget execution statements of government. Accounting was seen as a technical responsibility of the Accountant General’s office, which prepares financial statements, and the Auditor General, who conducts audits. This was considered a ‘control formality’ with limited implications for the rest of the government or citizens. However, the past two decades have seen significant changes to this perception. Here are five top trends on the emerging role of the accounting profession in the public sector, which can be transformative in 2025.
1. Sustainability Reporting in the Public Sector
With the support of the World Bank, the International Public Sector Accounting Standards Board (IPSASB) in 2024 took the landmark decision to issue the first set of draft Sustainability Reporting Standards (SRS) dealing with Climate-Related Disclosures. While the full suite of public sector SRS may take up to a decade, the ball is set rolling. For the first time, public-sector accountants have taken the challenge of moving outside their comfort zone of traditional accounting and auditing.
There remain several unanswered questions, from the need for increased capacity within the accounting profession to deal with sustainability to harmonization with several other sustainability reporting approaches, including IFRS Sustainability. Supreme Audit Institutions have already initiated discussions on the role of external audit in sustainability reporting through the Global Summit of SAIs. The year 2025 is likely to be a watershed year through public consultation on draft SRS issued by IPSASB and the broader alignment of expectations, thereby significantly scaling up the responsibilities of the accounting profession in the public sector.
2. Accounting Information as the Fulcrum of Public Financial Management
Public Financial Management (PFM) is one of the most interdisciplinary professions. Accountants, economists, public policy experts, and administrators in governments play a key role in managing public finances. Public Expenditure and Financial Accountability (PEFA), the gold standard measuring framework for PFM, uses 31 indicators further segregated into 94 dimensions. Accounting and Reporting (Pillar VI) of the PEFA framework covers three Performance Indicators (PI) – PI 27 on ‘Financial data integrity,’ PI 28 on ‘In-year budget reporting,’ and PI 29 on ‘Annual Financial Statements,’ which are directly the responsibility of public sector accounting. Most of the other dimensions of PEFA either draw from accounting information or are influenced by government accounting, and the role of public accountants is likely to expand.
3. Balance Sheet Approach to Public Finances
Dust seems to have settled over two decades of debate over the merits of government accounting moving from a cash to an accrual basis. It is forecasted that by 2025, the number of countries reporting on an accrual basis will reach 50%. If achieved, this change will be a watershed moment for accounting reforms fundamentally influencing government policy decisions. Accrual accounting provides a complete picture of revenues, expenditure, assets, and liabilities, enabling government and all stakeholders to consider intergenerational equity in present-day policy making. In making the transition to accrual accounting, countries will be able to draw on the full suite of accrual basis international standards issued by IPSAS, guidance under pathways to accrual accounting, as well as international development partners support.
4. Artificial Intelligence in Public Sector Accounting
The past two decades have seen countries make rapid strides in the implementation of GovTech solutions in PFM. These developments include IFMIS / FMIS solutions, Debt Management Systems, eProcurement systems, and Public Investment Management systems. Computer Assisted Audit Tools (CAATs) and Audit Management Systems enable Supreme Audit Institutions (SAIs) to conduct audits. GovTech solutions in PFM are large transaction processing systems, which can benefit significantly from leveraging AI. A recent OECD paper on AI in PFM notes, “Over time, and with the quality of data increasing, new layers of technology have been added (to PFM): data analytics, BI tools, RPA, and more recently AI technologies.”
The year 2025 is likely to see the emergence of trends where several routine public sector accounting and auditing tasks move from humans to machines, enhancing the role of public sector accountants to value-added functions. These could range from predictive analysis on the impact of budget decisions on service delivery, perpetual forecasting of balance sheets, consolidation of accounts of various levels of government for whole of government balance sheets, and identification of red flags and risks of wastage, fraud, and corruption.
5. Collaboration between IFAC, PAOs, and Development Partners
MOSAIC (Memorandum of Understanding to Strengthen Accountancy and Improve Collaboration) sets out the basis for improving cooperation and collaboration between IFAC, international donors, and the international development community. A high-level meeting, in September  2024 in Bucharest, Romania, co-chaired by the World Bank and PAODC in September 2024 in Bucharest, Romania, took landmark decisions to scale up the impact of MOSAIC as a cornerstone for a unified global approach to enhance the capacity of professional accountancy organizations (PAOs) and elevate the quality of financial management systems in emerging economies. This initiative is expected to see a dramatic increase in the scale and impact of activities in the public sector.
In conclusion, 2025 will witness a significantly greater role for the accounting profession. It can better equip itself for this role through enhanced collaboration with all stakeholders and improvements in the curriculum of professional accounting qualifications and university courses, with a greater emphasis on government accounting and auditing. This proactive approach will ensure that accountants are well-prepared to meet the challenges and opportunities that lie ahead, ultimately contributing to more robust and transparent PFM systems globally.
 
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Blog post by Matteo Ciccarelli, Matthieu Darracq Pariès, Bettina Landau and João Sousa | Central banks project future developments based on past data patterns and a set of assumptions. Crises can change economic structures, complicating this forecasting. The ECB Blog explains how scenario, risk and sensitivity analyses address the new uncertainty.
We use economic models and data patterns from the past to project the future. In normal times, assessing what conditions will be like in the near future can be a relatively “straightforward” task. When inflation and growth are stable and predictable our central forecast, or baseline projection, proves to be reliable. However, recent crises might have caused structural changes, which would introduce analytical uncertainty, in addition to the increased general uncertainty surrounding projections. In response, the ECB has been upgrading the tools and analyses we use in our staff macroeconomic projections, which form an integral part of our economic forecasting. One of these, scenario analysis, is particularly important in the light of a world of increasing uncertainty and change.
So, what do we mean by scenario analysis?
We use three types of additional checks to enhance our standard baseline forecasting: sensitivity analysis, risk analysis, and scenario analysis. All of them, just like our standard forecast, are a combination of two elements: the use of models and expert judgement. The three additional checks in particular aim to show possible deviations from the “normal”, or most likely, forecast. In this sense they complement our baseline projection with “what if” assessments.
First, the sensitivity analysis focuses on how changes in individual factors, such as a huge change in energy prices or a different exchange rate path, might affect economic variables like economic activity and inflation. By altering one variable at a time, models can evaluate the potential impact of uncertain assumptions on the baseline.
Second, risk analysis looks at how likely it is that economic developments will deviate from the baseline. In theory, the baseline projection would correspond to the mode (i.e. the most-likely outcome) of a “predictive distribution”, while events further away from the mode are less likely to occur. The probability distribution may also show asymmetry to the “right” or to the “left” (see Figure 1), depending on the balance of risks. This asymmetry – which may depend on various quantifiable or only qualitative risk factors – represents the risk balance around the projection. The risk balance helps to interpret projections and decide about monetary policy in periods of heightened uncertainty. The risk analysis tells us to which side deviations from the baseline are more likely. This risk distribution can be estimated by resorting to various models and tools.

Chart 1
Two probability distributions around the same 2% inflation baseline

Sources: Using an analogy to the literature on numerical regarding gaussian quadrature, see Miller, A.C. and T. Rice, (1983), “Discrete Approximations of Probability Distributions”, Management Science, Vol. 29, No. 3.

Finally, the scenario analysis addresses the even more complex “what if” questions. Specifically, it examines the consequences of hypothetical events or economic conditions that deviate from the baseline. For the sensitivity analysis we alter individual factors, while for the scenario analysis the approach is wider and more holistic. The spectrum ranges from major economic and political events – like wars, financial crises, or global energy shocks – to more specific situations like trade tariffs or housing market adjustments, which can affect several factors at the same time.
A typical scenario combines two broad sets of changes from the baseline: i) additional shocks over the projection horizon, and ii) changing features of the macroeconomic propagation mechanism. The shocks driving the scenarios can come from many different directions.
They may stem from the international environment of the euro area – for example through commodity prices, exchange rates or global trade. Or they can be driven by domestic economic conditions – such as financing conditions, household spending, or firms’ price-setting. Another driver might be supply-side fundamentals of the euro area economy – for example increases in productivity related to artificial intelligence.
In addition to the type and magnitude of a shock, scenarios may also think through different future developments by altering how the economy reacts to the shocks. For instance, wages and prices can adjust more quickly to a surge in the cost of energy than to small changes. Or households may save more during times of high uncertainty, or the financial sector could amplify a shock if credit constraints arise. Altogether, a scenario is a blend of various factors which evaluates the impact of economic events on the projection baseline.
How do scenarios relate to a forecast distribution and risk analysis? The economic literature shows that you can reasonably approximate the forecast distributions by resorting to a small number of scenarios (see Figure 1). For instance, a symmetric forecast distribution can be represented by one downside and one upside scenario with equal probabilities. More complex distributions may require multiple scenarios to capture high-impact, low-probability events, or secondary modes of the distribution as shown in Figure 1. This approach helps understand the range of possible outcomes and the associated risks. The advantage over the risk distribution is that scenarios provide a narrative for specific risk events and their impact on the economy instead of a simple probability distribution.
Assuming that the forecast distribution is quantifiable (based on given models) and interpretable as a probability distribution, scenarios can be used to explore the main properties of this distribution.
What scenario analysis does the ECB do?
The ECB progressively refines its analyses, particularly in response to significant economic events. In the past we regularly published forecast ranges and sensitivity analyses, and only occasionally included ad-hoc scenarios related to international shocks. However, the COVID-19 pandemic marked a turning point in our approach. During this highly uncertain period we used different scenarios to reflect varying assumptions about the pandemic’s progression. That provided insight into what was driving changes and supported discussing different options for action.
More recently, scenarios have been instrumental in assessing the impact of geopolitical tensions, such as the war in Ukraine and potential conflicts in the Middle East. For instance, the ECB developed scenarios to evaluate the effects of the Ukraine war and rising energy prices on inflation. This provided insights where standard sensitivity failed to account for extreme developments (Figure 2, panel a). The war in Ukraine and subsequent rises in energy prices led to a significant and unexpected surge in inflation. This could not have been foreseen in the central projections, given their conditionality on oil and gas price futures as expected by markets and other more standard assumptions. Nor could it have been foreseen by sensitivity analysis (Figure 2, panel b). Scenario analyses, however, did foresee this. Specifically, the assessment of scenarios helped by pointing to the risk of much stronger increases in energy commodity prices and consequently of much higher inflation in 2022 (the Ukraine war scenario published in March 2022 foresaw already 7% inflation in 2022, and around 8% in the June and September rounds). In this respect, the inflation scenario was useful to inform the ECB’s policy and its public communication.
Projections don’t usually look at the probability of “Black Swan” events – these are events which are very unlikely, but would have a huge impact – used, for example, in bank stress testing. This is an aspect that may deserve further attention, but it is unclear what the added value of such scenarios for monetary policy making is, unless there is also extreme uncertainty as, for example, during the pandemic.

Chart 2
Baseline projection, alternative scenarios and sensitivity analysis for inflation in 2022

Sources: ECB/Eurosystem staff projections and ECB staff calculation.
Notes: The ranges surrounding the respective baseline refer to a measure of uncertainty based on past projection errors, after adjustment for outliers, showing the 90% probability that the outcome of HICP inflation will fall within this interval. Panel a): Max and Min refer to the highest and lowest outcome from various scenarios including scenarios on the war in Ukraine, higher inflation expectations, real wage catch up etc. Panel b) Max and Min refer to the highest and lowest outcome from sensitivity analyses related to energy prices, exchange rates and market interest rates.

Scenario analysis: an invaluable complementary tool
Our experience shows that scenario analyses play an important role in macroeconomic projections by complementing aspects that are not included in the baseline forecasts. Together with sensitivity and risk analysis, they provide a robust toolkit to prepare for contingency or emergency planning and to give policymakers courses of action for alternative futures, and therefore better input to fulfil their mandate.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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Transition plans hold potential for enhancing financial stability assessments by providing forward-looking information that can be useful to measure and monitor climate-related risks.
This report considers the role that financial and non-financial firms’ transition plans can play for financial stability assessments, in particular as a source of information for monitoring climate-related financial risks and vulnerabilities, and as a tool for helping to address some of those risks.
Climate transition planning and the resulting outputs – transition plans – have seen increased interest in recent years as a tool for firms to articulate their strategies and manage climate risks. Transition plans are increasingly being used by shareholders, investors and regulators to be informed of a company’s climate strategy and approaches to net zero transition.
Transition planning and transition plans can help address climate-related financial risks through three channels:

They facilitate firms’ strategy setting, which contributes to better risk management.
They help inform investment decisions.
They can support authorities’ macro-monitoring of transition and physical risks both in the financial system and the real economy.

Climate transition plans hold potential for enhancing financial stability, as they provide forward-looking information that can be useful to measure and monitor climate-related financial risks at micro- and macro-levels. However, certain conditions need to be met to enable wider use of transition plans for financial stability purposes. These include enhancing the coverage, transparency, credibility, comparability and availability of information in those plans.
Broader adoption of transition plans and continued efforts towards standardisation, including ongoing and planned work by international organisations and standard-setters, are key to making transition plans practically usable for financial stability and macroprudential purposes.

 
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Today, the Department of Commerce Office of Space Commerce published a report on the department’s space commerce accomplishments under the Biden-Harris Administration. 
A message from Don Graves, Deputy Secretary of Commerce
Under the Biden-Harris Administration, the Department of Commerce has taken many concrete actions to promote the growth and competitiveness of the U.S. commercial space sector. The Department’s strategic objective to “advance U.S. leadership in the global commercial space industry” makes the lives of American citizens easier every day. Critical space services – from communications and navigation to precision agriculture and disaster preparedness–support 347,000 private-sector jobs that accounted for $131.8 billion (0.5 percent) of our GDP in 2022.
Throughout the Administration, we have grown commercial partnerships and trade, broadened the workforce, increased industry participation, and protected U.S. satellite interests. All the while, the Department continued to operate its own space systems to observe and predict critical weather phenomena. The best is ahead for this vibrant American industry, and the Department of Commerce will continue to contribute to its growth and success.
Prioritized Space Commerce Within the Department
To focus the Department on space, Deputy Secretary Don Graves established a Commercial Space Coordinating Committee that regularly engaged the bureau heads in space discussions. The Department consolidated and uplifted offices that advocate for and enable the space industry. The Office of Space Commerce (OSC) moved into the front office of NOAA, raising its profile within the Department to better support the Under Secretary and Office of the Secretary. The Commercial Remote Sensing Regulatory Affairs office that authorizes U.S. imaging satellites merged into OSC. NOAA also established an independent Advisory Committee on Excellence in Space (ACES) providing expert views from industry stakeholders on policy, regulatory, and operational issues.
Streamlined Space Regulations
The Department’s Bureau of Industry and Security (BIS) provided significant regulatory relief to the U.S. space industry, particularly when exporting spacecraft and related items to U.S. allies and partners by streamlining relevant export controls. BIS worked with the State Department to release draft rules that promise even further streamlining for space exporters in 2025. Meanwhile, NOAA implemented streamlined procedures for its licensing of commercial remote sensing satellites, reducing approval timelines to an average of 21 days. NOAA began developing an online portal to further improve license processing. NOAA eliminated dozens of conditions from its licenses that had previously restricted U.S. remote sensing firms from operating at their full capability. Each regulatory move improved U.S. industry’s ability to compete for global business.
In an effort to provide regulatory certainty for future space commerce, the Department participated in the development of the Administration’s U.S. Novel Space Activities Authorization and Supervision Framework and related legislation.
Established a Modern Space Traffic Safety System
The Department made major strides to address problems of space safety and sustainability as Earth’s orbits become increasingly congested with traffic and hazardous debris. In September 2024, NOAA’s Traffic Coordination System for Space (TraCSS) entered service for an initial set of users representing about 1,000 operational satellites. TraCSS is a modern, cloud-based IT system providing safety notifications of potential in-space collisions to satellite operators.
To reach this point, the Department spent years collaborating with the Department of Defense (DoD), which has provided such notifications since the 2000s but is migrating this responsibility to DOC. NOAA’s OSC conducted a series of pilots and pathfinder projects with commercial space situational awareness (SSA) companies to inform the development of TraCSS, which is designed to leverage commercial data, software, and services. In support of the emerging partnership between TraCSS and the private sector, OSC contracted with commercial firms to establish the cloud infrastructure for TraCSS, develop the software backbone, and provide a public website and interface. OSC regularly engaged with stakeholders through multiple RFIs, public listening sessions, and CEO roundtables to receive feedback and ensure TraCSS meets user needs.
Initiated Global Dialogue on Space Traffic Coordination
The Department promoted international coordination to minimize the risk of conflicting space traffic safety information. In April 2024, OSC released its vision for Global Space Situational Awareness Coordination of a global, coordinated system of SSA providers, with a series of national or regional hubs providing SSA information and services to spacecraft operators. To take initial steps toward international SSA coordination, the OSC conducted a joint analysis with the European Union Space Surveillance and Tracking (EU SST) program to compare the SSA services provided by TraCSS and EU SST, respectively, and published the results at the 2024 Advanced Maui Optical Surveillance (AMOS) Conference.
Encouraged International Space Business Partnerships & Trade
The Department organized and led international commercial space dialogues with multiple nations to promote business partnerships and strengthen diplomatic ties. The list of nations engaged includes Australia, Canada, France, Germany, India, Japan, New Zealand, Philippines, Republic of Korea, and Singapore, as well as nations from the African Union.
The International Trade Administration (ITA) promoted U.S. aerospace trade interests as the industry faced mounting competition from abroad. During 2021-2024, ITA’s Advocacy Center managed dozens of active space-related cases and supported contract wins with a total value of billions of dollars, supporting tens of thousands of U.S. jobs. ITA organized panels at its annual SelectUSA Investment Summit to encourage foreign investment in the U.S. space industry.
Measured the U.S. Space Economy
The Bureau of Economic Analysis (BEA) published a series of annual statistics quantifying the U.S. space economy in terms of contributions to GPD, employment, and other key measures. These data publications provided a definitive baseline and trends to inform decision makers in government and industry. BEA held a workshop in 2024 to receive stakeholder feedback for improving its statistical model. To provide actionable insights into the health of the U.S. space supply chain, the Bureau of Industry and Security (BIS) conducted a civil space industrial base assessment, collecting data from over 1,700 U.S. space companies and suppliers. To analyze trends in commercial space innovation, the U.S. Patent and Trademark Office (USPTO) conducted a review of space-related patents.
Supported Space-Related Intellectual Property
The U.S. Patent and Trademark Office (USPTO) supported commercial space innovation through stakeholder initiatives aimed at reducing barriers to the intellectual property landscape. These included a working group on accelerating commercial space innovation, IP seminars at the 2023 Paris Airshow, and an international dialogue focused on the intersection of IP and the expanding commercial space sector. The dialogue provided in-depth discussion of the convergence of IP and space law, as well as challenges and opportunities for commercial space startups and small/medium-sized enterprises.
Advanced Cybersecurity for Space Systems
To enhance the resiliency of U.S. commercial space systems, the National Institute of Standards and Technology (NIST) issued guidelines applying the NIST Cybersecurity Framework to commercial satellite operations, satellite ground segments, hybrid satellite networks, and positioning, navigation, and timing systems. NIST also worked with other agencies to advance zero-trust architecture implementation. NIST and NOAA/OSC co-hosted a series of symposia to increase the space community’s awareness of cyber risks and solutions.
Promoted Technical Standards for Space Development
NIST and NOAA/OSC actively participated in working groups of international standards bodies to develop and promulgate technical standards for space activities. These include standards for space traffic coordination, which inform the data standards for OSC’s TraCSS. In 2024, NIST hosted/co-hosted a series of international space standards workshops in Washington that brought together experts in space communications and navigation to develop a multi-national approach to interoperability, including on and around the Moon.
Promoted Satellite Spectrum Access and Connectivity
The National Telecommunications and Information Administration (NTIA) promoted and enabled space-based connectivity in the United States and globally. At the 2023 World Radiocommunication Conference of the International Telecommunications Union, NTIA helped advance the global standing of the U.S. satellite and space industries by securing favorable outcomes on spectrum access, orbital access, and space sustainability. NTIA also paved the way for growth in the commercial space sector by successfully coordinating more than 1,000 FCC applications for satellites, earth stations, launches, and other space uses, thereby allowing both federal and commercial missions to thrive.
Operated Environmental Satellites to Protect the Public and Monitor Earth
As the number and intensity of severe weather events reached record highs, NOAA’s satellites collected environmental observations that helped forecasters make predictions that saved lives and property. The satellite data was vital to tracking hurricanes and other severe storms, droughts, fires, volcanic eruptions, floods, and space weather. NOAA launched two next-generation GOES-R Series satellites and the NOAA-21 polar-orbiting satellite, greatly improving the precision of its monitoring and forecasts to protect not only the public, but also ecosystems such as coral reefs. NOAA achieved significant milestones in its design and acquisition of future satellite capabilities, including the GeoXO system, QuickSounder project, Space Weather Next L5 and L1 Series projects, and Space Weather Follow-On mission. NOAA also developed new AI tools to detect fires from satellite data, helping reduce response times for fire managers.
Fostered Diversity and Opportunity in the Space Industry
The Department engaged in a number of initiatives intended to broaden participation in the space industry workforce and supplier base in order to sustain the rapid growth of the U.S. space economy. The Department collaborated with multiple organizations focused on increasing diversity, equity, and inclusion in the space community. Deputy Secretary Don Graves hosted a Women’s History Month event celebrating women in space commerce, participated in a Black Space Week event highlighting African American contributions to space, and hosted a joint summit of the Patti Grace Smith and Brooke Owens Fellowship programs that advance DEI in the space industry. At the AIAA ASCEND 2024 conference, NOAA/OSC cosponsored the Diverse Dozen event programming, which highlighted underrepresented voices to promote DEI in the space community. The Minority Business Development Agency (MBDA) partnered with NASA to connect minority business enterprises to NASA acquisition and development opportunities, boosting equitable participation in the space economy.
Leveraged Commercial Space Capabilities for Weather Observation
NOAA made various commercial satellite data buys that improved its weather forecasts while supporting the development of commercial markets. In 2021-2024, NOAA placed seven data orders for radio occultation satellite data to enhance forecasting accuracy and effectiveness. NOAA also bought commercial satellite data to evaluate its ability to meet other requirements, including for space weather, ocean surface winds, and microwave sounding.
 
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NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the December 2024 Survey of Consumer Expectations, which shows that inflation expectations were unchanged at the short-term horizon, increased at the medium-term horizon, and decreased at the longer-term horizon. The average perceived likelihoods of a job loss, voluntary job separation, and finding a job in the event of a job loss all declined. While year-ahead household income growth expectations declined slightly and are now comparable to their pre-pandemic levels, spending growth expectations increased and remain well above pre-pandemic readings.
The main findings from the December 2024 Survey are:
Inflation

Median inflation expectations were unchanged at 3.0% at the one-year horizon, increased to 3.0% from 2.6% at the three-year horizon, and declined to 2.7% from 2.9% at the five-year horizon. The increase at the three-year horizon was broad-based across age, education, and income groups. However, the decline at the five-year horizon was driven by respondents below age 40 and was most pronounced for those with a high-school education or less. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) was unchanged at the one-year horizon, increased at the three-year horizon, and decreased at the five-year horizon.
Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the one- and three-year horizons and declined at the five-year horizon.
Median home price growth expectations increased by 0.1 percentage point to 3.1%. The series has held in a range from 3.0 to 3.3% since August 2023.
Year-ahead commodity price expectations for food increased by 0.2 percentage point to 4.0%, while price expectations for other commodities declined. Year-ahead price expectations fell by 0.7 percentage point for gas to 2.0% (the lowest reading since September 2022), by 1 percentage point for the cost of college education to 5.7%, by 0.2 percentage point for the cost of medical care to 5.8%, and by 0.2 percentage point for rent to 5.5%.

Labor Market

Median one-year-ahead expected earnings growth decreased by 0.2 percentage point to 2.8%. The current reading equals the 12-month trailing average of 2.8%.
Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—declined by 0.4 percentage point to 34.6%.
The mean perceived probability of losing one’s job in the next 12 months declined by 1.6 percentage points to 11.9%. The mean probability of leaving one’s job voluntarily in the next 12 months also declined by 2.0 percentage points to 18.2%. Both readings are the lowest since January 2024. The declines were most pronounced for the respondents with some college education and those with annual household incomes below $50,000.
The mean perceived probability of finding a job if one’s current job was lost declined sharply, to 50.2% from 54.1% in November 2024. This is the lowest reading since April 2021. The decline was most pronounced for respondents with a high school degree or less.

Household Finance

Median expected growth in household income declined by 0.3 percentage point to 2.8%, the lowest reading since May 2021. The series remains slightly above the pre-pandemic level of 2.7% from February 2020.
Median household spending growth expectations increased by 0.1 percentage point to 4.8%, remaining well above pre-pandemic levels.
Perceptions of credit access compared to a year ago deteriorated, with a larger share of respondents reporting tighter conditions. Expectations about credit access a year from now also deteriorated, with a smaller share of respondents expecting looser credit and a larger share expecting tighter credit a year from now.
The average perceived probability of missing a minimum debt payment over the next three months increased to 14.2% from 13.2%. The increase was broad-based across income and education groups. This reading equals the September 2024 reading, which was the highest level of the series since April 2020.
The median expected year-ahead change in taxes at current income level decreased by 0.4 percentage point to 3.0%, its lowest reading since October 2020.
Median year-ahead expected growth in government debt declined by 0.3 percentage point to 5.9%, reaching the lowest level since January 2018.
The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now decreased by 1.5 percentage points to 25.2%.
Perceptions about households’ current financial situations improved, with fewer respondents reporting being worse off and more respondents reporting being better off than a year ago. Year-ahead expectations were essentially unchanged, with a smaller share of respondents expecting to be worse off and a smaller share expecting to be better off a year from now.
The mean perceived probability that U.S. stock prices will be higher 12 months from now declined by 0.6 percentage point to 39.8%.

About the Survey of Consumer Expectations (SCE)
The SCE contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy.
The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, this panel allows us to observe the changes in expectations and behavior of the same individuals over time. For further information on the SCE, please refer to an overview of the survey methodology here, the interactive chart guide, and the survey questionnaire.
For more information, please contact:

Mariah Measey, NEW YORK FED

 
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Blog post by Arnaud Dyèvre | Investments in R&D typically foster productivity growth. But the funding source matters. The ECB Blog shows that publicly funded R&D complements private investments and has greater effects on productivity growth because of its larger spillovers.
Arguably, the track record of government-funded innovation is mixed. On the one hand, governments have funded some technological endeavours that later turned out to be unsuccessful and costly. On the other hand, the history of technology is also filled with crucial innovations developed with public funding: lithium-iron batteries, high-speed trains and the GPS are all either direct results or byproducts of governments providing funding for research and development (R&D). Knowing what sets government funding apart and how it interacts with private R&D is key to our understanding of what drives economic growth.
Comparing private and public R&D funding in the United States between 1950 and 2020, I show in this Blog post that, historically, public R&D tends to produce patents that are more impactful and rely more on science. Furthermore, government-funded R&D has significant spillover effects on the wider economy and a larger impact on productivity. This US experience can be informative for growth and innovation in the euro area, where the need for growth-enhancing policies is more salient than ever after a decade of disappointing productivity growth.
The shift from public to private R&D
Overall funding for R&D has increased in the United States since the 1950s, but there has been a significant change in its composition (Chart 1). Measured as a share of GDP, R&D that is directly funded by the government (but which may be carried out by private firms, universities or government labs) peaked in 1964 (blue line) and has since diminished by two-thirds. In contrast, private R&D has tripled over the same period (orange line), surpassing government funding as the largest source in 1980. Meanwhile, funding from NGOs, universities, and individual US states has always been marginal.
Chart 1
The shift in US R&D funding from public to private
Source: Paper, based on data from the National Science Foundation.
Key differences between public and private R&D
The implications of this decline in publicly funded R&D become clear when looking at US patent data over the past 70 years, distinguishing between patents funded by public money and those funded by private money.[1] Publicly funded patents differ significantly from those developed with private funding, irrespective of who performs the R&D: firms, universities or government labs.
First, patents funded by public money are much more likely to be grounded in scientific research. They cite scientific papers nearly four times as often as private patents do. This suggests that public patents are more reliant on fundamental knowledge, whereas private firms tend to focus on research with more immediate commercial applications.
Second, publicly funded patents tend to be more impactful than private ones. I measure the impact of a patent by the number of times it is cited by other patents[2] and by its potential to be a breakthrough innovation (that is, a patent that opens an entirely new technology class). Even when adjusting for the financial input and the productivity of the patent’s inventors, I find that publicly funded patents are 19% more likely to be breakthrough innovations than private ones.
Third, and most importantly, public R&D generates greater “spillovers”, meaning that its innovations are beneficial to a greater number of firms across the economy. I measure the extent of a patent’s spillovers by counting the number of patent “technology classes” (i.e. technological categories) that cite this patent. Public patents are, on average, referenced by a larger number of technology classes. For instance, the patent most cited across technology classes was filed in 1989 by a company that received NASA funding and developed microactuators, an invention that found applications in medicine, consumer electronics, aerospace, and many other areas.
While this comparison does not capture all aspects of R&D – at the very least because not all innovations are patented – it does focus my study on innovations with commercial applications. As such, this approach is uniquely suited to understanding the impacts of R&D on firm productivity, which I discuss in the next section.
Public R&D spillovers increase firm productivity
The larger spillovers from publicly funded innovations have significant positive effects on the private sector, boosting firm productivity, further patent production, and additional R&D spending. I find a causal link by examining funding shocks, which I define as all changes in US federal government spending on R&D across agencies and time. These shocks offer a natural experiment akin to a randomised control trial, the standard for establishing causality in science.
The NASA funding surge of the 1960s is a telling example of such shocks. In response to the USSR’s launch of Sputnik in 1957, the US government spent an average of USD 25 billion a year on research initiatives in constant 2020 dollars in the subsequent decade. By comparison, NASA’s 1957 R&D budget was a mere USD 500 million. This surge in funding increased NASA’s patent and research output, which in turn spilled over to the private sector. Companies that produced technologies similar to the ones on which NASA was working had access to a larger flow of knowledge from NASA, which prompted them to produce more patents and invest more in R&D as well.
Using these variations in funding as well as firms’ technological proximity to specific federal agencies, I find that a 1% increase in publicly funded patents leads to a 0.025% increase in total factor productivity (TFP), a 0.024% rise in the firms’ own patent output, and a 0.031% increase in their R&D expenditures.[3] These impacts are shown, with confidence intervals, in Chart 2. Confidence intervals show how much statistical noise there is in the data. The wider the intervals, the less confident one can be in the precision of the estimations. Notably, smaller firms, which may lack the resources to conduct fundamental R&D, benefit more from public R&D spillovers than larger firms.
Chart 2
Impacts of public R&D spillovers on firm productivity and innovation
Source: Paper.
Implications for overall productivity
Given the differences between public and private R&D, and the positive impacts of public R&D on firm productivity, could the decline in public R&D be partly responsible for the slowdown in US productivity growth? To evaluate the aggregate consequences of these differences, I built a macroeconomic model of US productivity since 1950, in which both the government and private firms engage in R&D. A key assumption is that the government is more interested in generating breakthrough innovations that may or may not be useful for firms, while firms focus their R&D efforts on more targeted innovation that have a clear potential to improve their own productivity and products. As a result, the government specialises in fundamental R&D while firms specialise in applied R&D. The model is then calibrated with the decline in public R&D we saw in Chart 1, as well as the impact estimates from Chart 2.
The results suggest that around one-third of the decline in productivity growth since 1960 can be attributed to the reduced role of public R&D. Chart 3 shows the declining productivity growth in the United States over the last 70 years (in orange) and the TFP growth predicted by the model (in blue).
Chart 3
US productivity growth; model versus data
Source: Paper.
This does not imply that public R&D is inherently better than private R&D. Instead, they serve complementary roles. Public R&D lays the groundwork through fundamental research, which entrepreneurs then build upon to create marketable products and services. A balanced mix of both types of R&D is essential for driving productivity, but it appears that the United States is currently overly reliant on private R&D.
Which lessons can the euro area and the broader European Union draw from this evidence? In the absence of directly comparable, long-term data in the EU, making EU-specific recommendations is a speculative exercise. One can note, however, that a key issue faced by European innovators is not the lack of public funding of innovation, but rather the lack of venture capital allowing innovators to translate ideas into profitable businesses. This is a core tenet of the recent report by Mario Draghi on the future of European competitiveness, and the strong complementarities between public and private R&D highlighted by this research echo this point.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
Check out The ECB Blog and subscribe for future posts.

Patents that receive funding from the federal government in the US typically acknowledge the receipt of a federal grant in the main text of the patent. While such disclosure was initially voluntary, it has become a requirement for all federally funded patents after the passing of the Bayh-Dole act in 1980. The requirement applies to all entities doing R&D, whether they are private firms or universities.
Patent citations are a common measure of the technical value of an innovation. A patent that is relevant to many other inventions will accrue many citations.
Total factor productivity is a firm’s contribution to output not accounted for by capital or labour. It is a measure of the efficiency with which a firm mobilises all factors of production together to generate its output.These results are obtained from running regressions on a sample of publicly listed firms in all sectors of the US economy.

 
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WASHINGTON, D.C. – The U.S. Department of Commerce’s International Trade Administration (ITA) is proud to announce its 2024 achievements, highlighting key efforts to enhance the competitiveness of U.S. businesses and workers, strengthen supply chains, and drive innovation in international trade.
“2024 was yet another impressive year for U.S. competitiveness across international markets,” said Under Secretary for International Trade Marisa Lago. “From strengthening supply chains to sustaining U.S. leadership in technology and innovation, ITA continues to enhance U.S. economic security and promote inclusive prosperity for all Americans.”
Key highlights include:
Strengthening American Supply Chains to Advance U.S. Competitiveness
The Supply Chain Center developed innovative tools to assess and help mitigate supply chain risks across critical industries, with special focus on critical and emerging technologies such as AI data centers, quantum computing, and hydrogen. The Supply Chain Center worked across the U.S. Government and with industry, academia, labor, and civil society leaders to enhance supply chain resilience, improve disruption preparedness, and foster strategic policies on supply chains.
A. Launched First-of-Its-Kind Supply Chain Risk Assessment Tool

ITA introduced the pioneering supply chain risk assessment tool, SCALE, which evaluates structural risks across more than 400 industries that are central to the U.S. economy.

B. Hosted Inaugural Supply Chain Summit

ITA organized the first-ever Supply Chain Summit in September 2024 with the Council on Foreign Relations, bringing together over 200 in-person leaders and 3,500 online participants to explore proactive strategies for enhancing supply chain resilience.

C. Partnering with 13 Indo-Pacific Nations to Secure Supply Chains

ITA secured commitments under the Indo-Pacific Economic Framework for Prosperity (IPEF) Supply Chain Agreement to strengthen semiconductor, chemical, critical mineral, and healthcare supply chains.

The IPEF Supply Chain Council, chaired by the U.S. Commerce Department, advanced multilateral cooperation on logistics and analysis.

D. Charting an Innovative Approach to Tackling Critical Mineral Supply Chains

ITA conducted in-depth analyses of critical mineral supply chains to address vulnerabilities and enhance resilience in industries such as semiconductors and batteries.

Promoting Strong Trade Enforcement for U.S. Workers and Businesses
A. Record-Breaking Enforcement

ITA administered over 700 AD/CVD orders, each of which defends U.S. businesses and workers from unfair trade practices.

B. Groundbreaking Regulations

ITA finalized major new trade enforcement regulations, expanding the range of unfair trade practices that ITA is taking action against. These unfair practices span from transnational subsidies to weak labor, environmental, human rights and intellectual property protections.

C. State-of-the-Art Monitoring

ITA launched the Global Scrap Monitor to enhance supply chain transparency about steel and aluminum imports, building upon the best-in-class Steel Import Monitoring and Analysis and Aluminum Import Monitoring systems.

Strengthening Economic Cooperation with Indo-Pacific Nations

At the inaugural Clean Economy Investor Forum in June 2024, the 14 IPEF partner nations identified $23 billion in investment opportunities for sustainable infrastructure projects in the Indo-Pacific.

The IPEF partner nations continued to deliver benefits for businesses and workers through landmark agreements to strengthen supply chain resilience, catalyze investments in sustainable infrastructure and climate technologies, and promote fair and predictable business environments.

Modernizing Advocacy, Export and Investment Promotion Services
A. Developed New Tools to Support U.S. Exporters

ITA released updated digital tools and services, such as the Global Business Navigator, the Exporter Roadmap, new episodes of the Export Nation Podcast, and a Business Matchmaking Platform.

B. Served a Wide Array of U.S. Businesses

ITA assisted approximately 93,000 U.S. clients, over 80% of which were micro, small or medium-sized companies. Over 20% of these clients were women-owned businesses, minority-owned businesses, or businesses from rural communities.

ITA facilitated $109 billion in U.S. exports and $52 billion in inbound investment with a focus on priority sectors including semiconductors and clean energy — altogether supporting over 519,000 U.S. jobs.

2024’s foreign direct investment accounts for about 20% of all FDI that SelectUSA has facilitated since its establishment in 2011.

ITA helped U.S. exporters secure foreign procurements valued at over $72 billion, supporting an estimated 320,000 U.S. jobs.

ITA’s Foreign-Trade Zones program supported 550,000 jobs and facilitated $149 billion in exports, strengthening U.S. manufacturing and employment.

Strengthening Outbound Investment Security

ITA played a key role in establishing the Outbound Investment Security Program to respond to threats posed by countries of concern attempting to develop sensitive technologies. ITA led stakeholder outreach, including significant input from U.S. investors, to help formulate a targeted policy framework.

Surpassing Travel and Tourism Goals

ITA drove significant progress under the National Travel and Tourism Strategy in 2024, and as a result, the United States is projected to surpass the Strategy’s five-year visitation goal of 90 million international visitors annually a year early in 2026.

Looking Ahead: ITA will continue to empower U.S. businesses and workers to compete and succeed globally, while fostering innovation and ensuring a level playing field in international trade.
 
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Prepared by Pablo Anaya Longaric, Alessandro De Sanctis, Charlotte Grynberg, Vasileios Kostakis and Francesca Vinci
Published as part of the ECB Economic Bulletin, Issue 8/2024.
 
1 Introduction
The surge in energy prices following the unjustified Russian invasion of Ukraine exposed the EU to the largest energy shock since the 1970s. As a key input in virtually any production process, the sharp rise in energy prices not only contributed to a surge in inflation and a loss of purchasing power for households but also to a significant increase in input costs, with ripple effects across all economic sectors.
Shocks that increase the cost of energy can negatively influence economic dynamics not only in the short run but also in the medium to long run through the investment channel. In the short term, higher input costs put downward pressure on production.[1] This can also result in lower investment, with negative consequences for productivity growth in the long term.[2]
The economic literature has long identified the importance of investment for productivity. Corporate investment, especially in fixed capital and research and development (R&D), is at the heart of productivity growth, which is in turn directly linked to the ability of firms to compete in international markets.[3] Productivity improvements reduce the cost of production per unit of output, allowing firms to lower prices and/or increase profit margins. Productivity increases can also enhance export competitiveness, as more productive firms are better positioned to capture and expand their market share.[4]
Energy shocks can also dampen a country’s competitiveness through their negative impact on investment and productivity. Following a positive shock to energy costs, compressed profit margins (especially for energy-intensive firms), subdued economic activity, heightened uncertainty and, in some cases, tighter financing conditions may reduce investment by firms, paving the way for future competitiveness losses.[5] This may occur particularly when producers are unable to fully pass on the cost increases to consumers, for instance due to a high price elasticity of demand.[6]
However, energy shocks can also incentivise firms to invest in energy generation and energy-saving projects.[7] Recent surveys indicate that firms are adapting to the evolving energy landscape by reducing their dependence on traditional energy sources in order to shelter against future energy shocks and secure competitive advantages.[8] These efforts to reduce the energy bill can lead to an increase in green investment, which can mitigate the overall impact of energy shocks on total investment. However, despite their potential to mitigate future energy shocks (and to reduce future energy prices), green investments may also be adversely affected by the direct and indirect consequences of an increase in energy prices.[9]
This article explores how energy shocks influence investment by European firms, focusing on fixed capital and R&D expenditure. Empirical analysis shows that energy shocks can have a negative impact on corporate investment and thus, potentially, undermine European productivity growth and future competitiveness. The analysis also shows that financially constrained firms and firms in energy-intensive sectors are more affected by energy shocks and respond by cutting investment more than other firms.
From a policy perspective, both national and EU measures are needed to reduce the exposure of the EU to future energy shocks. Further integration of European energy markets and progress in the green transition would contribute to reducing energy prices and strengthening energy supply, making the EU less vulnerable to adverse energy price developments.
 
2 The European energy mix
The main energy sources used in production in the EU are electricity and natural gas, together with oil and petroleum products. Electricity and natural gas are key inputs, each making up around a third of the EU’s industrial energy mix. These are followed by “oil and petroleum products” and “renewables and biofuels” at 11% each (Chart 1, panel a).[10] The industrial energy mix has remained largely unchanged over the past 15 years. When considering the energy landscape in which industry operates, it is also relevant to consider how the consumed electricity is generated, as this has a significant impact on its price. While the share of renewables in the EU electricity generation mix is growing, natural gas and other fossil fuels still play an important role (Chart 1, panel b), indirectly increasing their importance in the energy supply of firms.

Chart 1
Energy sources in industrial processes and electricity generation in the EU

(percentages)

Source: Eurostat.
Notes: Annual frequency. Panel a) refers to final consumption in the industrial sector. Panel b) refers to gross electricity generation. Oil and petroleum products exclude the biofuel portion. The category “other” includes manufactured gases, non-renewable waste, oil shale and oil sands, and peat and peat products.

Due to the marginal pricing system, the price of electricity is closely linked to fossil fuels. Electricity prices in short-term markets are determined by the most expensive facility used to generate electricity at any given point in time. In the EU, gas-fired power plants are typically the most expensive way of generating electricity, followed by coal, lignite and nuclear power. Renewables are typically the cheapest, as their variable costs are close to zero. A consequence of this mechanism is that gas often acts as the price-setter even though it generates a relatively low share of the EU’s electricity. According to the European Commission, in 2022 gas-fired power plants generated 19% of the EU’s electricity but set the price 55% of the time.[11]
Wholesale energy prices in the EU began rising significantly in the second half of 2021. As the EU imports nearly all the oil and gas it consumes, it is strongly exposed to price fluctuations in global markets, which can be affected by geopolitical developments and production decisions outside of the EU. Wholesale oil and gas prices started to go up in the second half of 2021, in part because of the recovery in economic activity following the pandemic and in part due to constraints in the supply of oil and gas. This was exacerbated by the Russian invasion of Ukraine in 2022, which drove up gas and oil prices further.[12] High gas prices had, in turn, a knock-on effect on electricity prices due to the marginal pricing system.
The spike in wholesale prices had a strong impact on the price of energy for EU industry. Wholesale prices are not transmitted perfectly to retail prices, as the latter are also influenced by factors such as taxation, regulatory frameworks, infrastructure availability, the electricity generation mix and contract structures. From 2021 onwards, many public policy measures were also taken to cushion energy shocks. Nevertheless, Chart 2 shows that the increase in wholesale prices was strongly transmitted to the retail prices paid by EU firms for electricity, natural gas and diesel. This had a significant impact on their production costs, with the producer price index for energy (PPI energy) more than doubling between 2020 and 2022.

Chart 2
Retail energy prices for firms in the EU

(left-hand scale: EUR/kWh; right-hand scale: index: 2021 = 100)

Sources: Eurostat and European Commission Oil Bulletin.
Notes: Frequency is semi-annual. Prices include all taxes and levies. For electricity and gas prices, data refer to medium-sized industrial consumers (band IC for electricity and I3 for gas). Gas prices for Cyprus and Malta are not included because Eurostat does not report the relevant data. As there is no Eurostat indicator for oil prices for non-household consumers, diesel is shown as an example of an oil product commonly used by EU industry, applying a conversion factor of 10 kWh per litre.

These developments spurred an intense policy debate about the EU’s dependence on imported energy and on the implications for its competitiveness in the face of energy shocks.[13] The EU relies significantly on imported energy and is thus more exposed to energy shocks than other major economies, such as the United States.[14]
 
3 The impact of energy shocks on EU corporate investment
While quantifying the effects of energy shocks on investment decisions is challenging, owing to the multitude of transmission channels as well as data limitations, exploring historical patterns can provide useful insights. To pin down the effect of energy shocks on investment, this article employs balance sheet data on publicly listed firms from Standard & Poor’s Compustat for the period 1999-2022 and estimates the response of fixed capital and R&D investment using local projections.[15]
Energy shocks can originate from different energy sources, and correctly identifying them is a major challenge. The energy crisis of 2022 was triggered by the disruption of natural gas supplies in Europe, which led to an increase in fossil fuel and electricity prices. However, given the historical importance of oil shocks, these have attracted more attention from academic literature than gas shocks, resulting in only a few reliable and readily available measures for the latter.[16] Furthermore, oil accounts for a significant share of energy consumed by the EU industrial sector, and prices of other energy sources, such as gas, are influenced by oil prices. Oil shocks can therefore be a good proxy for energy shocks, albeit with some caveats.[17] One of the most recent methods for identifying and measuring oil shocks concerns oil supply news shocks.[18] These shocks capture shifts in expectations about future oil production and prices rather than immediate disruptions, making them particularly relevant for investment decisions.[19]
Oil supply news shocks increase energy prices and reduce aggregate investment. As shown in Chart 3, an oil supply news shock leads to a contemporaneous increase of 7% in oil prices and of 1% in PPI energy.[20] Moreover, total gross fixed capital formation (GFCF) declines immediately after the shock, reaching a trough of -1.5% after two years. Investment in intellectual property products (IPP), which includes R&D, also decreases by 1% two years after the shock.[21]

Chart 3
Impact of oil supply news shocks on aggregate variables

a) Impact on oil prices and PPI energy

b) Impact on GFCF and IPP

(x-axis: years; y-axis: percentage changes)

(x-axis: years; y-axis: percentage changes)

Sources: Eurostat and ECB calculations.
Notes: The panels illustrate local projection estimation results on macroeconomic aggregates. The data for all regressions span the period from the first quarter of 1999 to the third quarter of 2023. For oil prices, the regression specification follows: βεΔhYj,t+h=ah+βhSt+ΞhXt-1+εt+h. PPI energy (index), GFCF (real 2015 EUR) and IPP (real 2015 EUR) include panel data for EU28 countries and the specification follows βεΔhYj,t+h=ajh+βhSt+ΞhXj,t-1+εj,t+h, where Yj,t+h is the outcome variable of interest at horizon h for country j, and Xj,t-1 includes a set of macroeconomic controls, including the lagged dependent variable. The shock St is normalised such that it increases PPI energy by 1% on impact. The solid lines show the estimated impulse responses, while the shaded areas represent 90% confidence intervals based on Newey-West standard errors robust to serial correlation (for oil prices) or Driscoll-Kraay standard errors robust to serial correlation and cross-section dependence.

Consistent with the aggregate evidence, firm-level analysis based on publicly listed firms shows that oil supply news shocks exert downward pressure on investment.[22] As shown in panel a) of Chart 4, following an oil supply news shock that increases PPI energy by 1%, capital expenditure of publicly listed firms decreases by 2.9% on impact and 4.1% after one year.[23] R&D expenditure displays a smaller decline of around 0.85% both on impact and one year after the oil shock (Chart 4, panel b). Compared to the aggregate analysis, firm-level results show a larger impact of the shocks on capital expenditure and a similar impact on R&D expenditure. A possible explanation for this discrepancy lies in the sample coverage. In the Compustat sample analysed, R&D expenditure accounts for approximately 60% of aggregate R&D spending on average during the sample period. In contrast, the sample coverage for capital expenditure is only around 20%. This suggests that the firm-level R&D response is likely to be more aligned with the aggregate results than the capital expenditure response. However, the exact nature of the difference in terms of capital expenditure is not known beforehand, meaning that the response could be either larger or smaller than the aggregate result. Examining the sectoral coverage reveals that energy-intensive firms are represented more in the firm-level sample than in the aggregated data. Specifically, the capital expenditure of energy-intensive firms makes up about 40% of total capital expenditure in the Compustat sample, whereas it only accounts for 12% in the aggregate data.[24] To the extent that energy-intensive firms are more susceptible to energy shocks and hence reduce investment more than non-energy-intensive firms, the firm-level results are consistent with the aggregate findings. This is discussed in more detail in the next paragraph.

Chart 4
Impact of oil supply news shocks on firms’ fixed capital and R&D expenditure

a) Impact on fixed capital expenditure

b) Impact on R&D expenditure

(x-axis: years; y-axis: percentage changes)

(x-axis: years; y-axis: percentage changes)

Source: ECB calculations.
Notes: Data cover publicly listed firms from Standard and Poor’s Compustat Global incorporated in EU28 countries over the period 1999-2022. Financial and utilities sectors are excluded. The econometric specification closely follows Cloyne, J. et al., “Monetary Policy, Corporate Finance, and Investment”, Journal of the European Economic Association, Vol. 21, No 6, 2023, pp. 2586-2634, which uses state-dependent local projections (see Jordà, Ò. and Taylor, A.M., “Local Projections”, NBER Working Paper, No 32822, August 2024) to estimate the response of corporate investment to a monetary policy shock. We estimate the effects of oil supply news shocks (S) on long-difference percentage changes in firm-level capital and R&D expenditure (Y), accounting for firm characteristics that drive the overall effect: βεΔhYj,t+h=ajh+βhSt+ΞhXj,t-1+εj,t+h.
The state-dependent local projections extend over a horizon of three years after the oil shock, with firm-level fixed effects and standard errors clustered at the firm and time level following Driscoll-Kraay. Matrix X includes controls for the lagged real assets of the firm, its equity to debt ratio, its liquidity ratio (defined as liquid assets over total liabilities), profit margin, sales growth and the GDP growth of the country where it is located, along with the corresponding central bank policy rate. The shock St is normalised such that it increases PPI energy by 1% on impact.
The solid lines show the estimated impulse responses, while the shaded areas show the 90% confidence intervals.

The role played by energy intensity warrants consideration because energy-intensive industries (EIIs) are particularly vulnerable to energy shocks owing to their energy needs. EIIs include sectors such as chemicals, metals, cement and glass and account for about 45% of electricity, gas and oil used by EU industries, despite representing less than 4% of EU gross value added in 2021.[25] These provide key materials for industries such as construction, the automotive industry and electronics and are important suppliers to sectors driving the green and digital transitions.[26] As a result, these are pivotal both to the EU’s decarbonisation goals and to its open strategic autonomy. However, European EIIs are burdened with electricity prices that are significantly higher than in some other economies, such as the United States, resulting in a competitive disadvantage.[27]
Financial constraints also play an important role in the investment decisions of firms. Financing conditions have long been recognised in the academic literature as critical enablers of investment, significantly influencing firms’ capacity to respond to shocks.[28] Survey evidence further indicates that financial constraints frequently emerge as major barriers to investment, particularly during periods of economic uncertainty.[29] Measuring financing constraints is challenging, as there is no agreed definition, but balance sheet data can be used to construct relevant estimates. The literature indicates that firms with relatively high debt (defined as a leverage ratio higher than the sample median) that are also of young age can be considered financially constrained.[30] High leverage constrains financing because firms with significant debt can be considered riskier, which leads to higher borrowing costs and stricter financing terms, while being a young firm compounds this constraint, as younger firms may lack established credit histories, collateral and proven revenue streams, making lenders more cautious when lending to them and thus limiting the availability of affordable external financing.
The joint occurrence of high energy intensity and financing constraints can amplify the effects of energy shocks. Recent survey data suggest that firms that self-identify as financially constrained are more likely to consider increases in energy costs as an impediment to investment than their non-financially constrained counterparts.[31] Empirical analysis reveals that financially constrained firms in energy-intensive sectors consistently reduce investment more sharply than other firms after an oil shock. Chart 5 shows the effect on firms, grouped according to energy intensity and financial constraints, of an oil supply news shock that raises PPI energy by 1% on impact. The analysis reveals that all groups reduce investment, but being in an energy-intensive sector and being financially constrained amplifies the impact of the shock on both capital and R&D expenditure.[32]

Chart 5
Impact of oil supply news shocks on capital and R&D expenditure by firm characteristics (energy intensity and financing constraints)

(x-axis: years; y-axis: percentage changes)

Source: ECB calculations.
Notes: For the econometric specification, see the notes to Chart 4. For the purposes of this analysis, financially constrained firms are those that are less than 20 years old and have a leverage ratio higher than the yearly sample median, which implies that whether a firm is financially constrained or not changes over time. The median was chosen to maximise observations per group, but results are robust to the choice of different thresholds. Energy-intensive firms are firms in NACE 2 sectors defined as EIIs by the European Commission.
The solid lines show the estimated impulse responses, while the shaded areas show the 90% confidence intervals.

 
4 Conclusion
The evidence presented in this article suggests that energy shocks tend to decrease investment and innovation in Europe, especially for financially constrained firms in energy-intensive sectors. Publicly listed firms in the EU reduce investment in response to energy shocks (as proxied by oil shocks). Empirical analysis indicates that a 1% increase in energy prices driven by oil shocks leads to a significant decrease in fixed capital expenditure (-4.1% after one year), while R&D spending drops by almost 1%, showing a more muted impact. Moreover, firms that are financially constrained and energy-intensive experience sharper reductions in investment following an oil price increase.
These findings are in line with a broad body of literature documenting the negative macroeconomic effects of oil shocks and confirm the importance of reducing the EU’s vulnerability to such shocks. The EU is heavily reliant on imported energy, making it more exposed to energy shocks than other major economies. As energy shocks put downward pressure on investment, and to the extent that investment slowdowns can lead to a decline in productivity, the EU is at risk of gradually losing competitiveness. This may threaten not only current but also future prosperity.[33]
Policy measures at both national and European level should therefore aim to secure the energy supply of the EU, lower energy prices and mitigate the exposure of firms to future energy shocks. While national interventions are best suited to address country-specific issues, EU actions should be aimed at tackling shared problems and fostering cross-country collaboration. The Draghi and Letta reports contain several proposals to address these issues.[34] These include strengthening joint procurement of gas imports to increase the EU’s market power and expanding the use of long-term electricity contracts. The two reports also emphasise that accelerating and simplifying permitting processes, channelling EU funds, and promoting cross-border projects to boost renewable energy production would enhance energy security and reduce energy prices in the medium term. Moreover, the Draghi report suggests targeted support measures for EIIs to ensure they remain competitive while contributing to decarbonisation. Finally, advancing the capital markets union could help ease financing constraints for firms, enabling them to invest in improving their energy efficiency. Together, these measures would have the potential to strengthen the resilience of the EU to future shocks and increase its long-term competitiveness.

See Lardic, S. and Mignon, V., “The impact of oil prices on GDP in European countries: An empirical investigation based on asymmetric cointegration”, Energy Policy, Vol. 34(18), December 2006, pp. 3910-3915.
Evidence presented in the article entitled “The impact of recent shocks and ongoing structural changes on euro area productivity growth”, Economic Bulletin, Issue 2, ECB, 2024, also shows that higher energy prices can lead to a reduction in productivity owing to the reallocation of factors of production within firms away from energy.
See Romer, P.M., “Increasing Returns and Long-Run Growth”, Journal of Political Economy, Vol. 94, No 5, 1986, pp. 1002-1037; and Romer, P.M., “Endogenous Technological Change”, Journal of Political Economy, Vol. 98, No 5, Part 2, 1990, pp. S71-S102.
See Melitz, M.J., “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity”, Econometrica, Vol. 71, No 6, November 2003, pp. 1695-1725.
See Lee, K., Kang, W. and Ratti, R.A., “Oil Price Shocks, Firm Uncertainty, And Investment”, Macroeconomic Dynamics, Vol. 15, No S3, November 2011, pp. 416-436.
See Matzner, A. and Steininger, L., “Firms’ heterogeneous (and unintended) investment response to carbon price increases”, Working Paper Series, No 2958, ECB, July 2024.
See Hassler, J., Krusell, P. and Olovsson, C., “Directed Technical Change as a Response to Natural Resource Scarcity”, Journal of Political Economy, Vol. 129, No 11, November 2021, pp. 3039-3072.
See “EIB Investment Survey 2023 – European Union overview”, European Investment Bank, October 2023; and “EIB Investment Survey 2024 – European Union overview”, European Investment Bank, October 2024.
See Bijnens, G., Duprez, C. and Hutchinson, J., “Obstacles to the greening of energy-intensive industries”, The ECB Blog, ECB, 17 September 2024.
The oil and petroleum products most commonly used by industry are gas oil and diesel oil, while the renewables and biofuels most commonly used by industry are solid biofuels such as wood.
See Gasparella, A., Koolen, D. and Zucker, A., “The Merit Order and Price-Setting Dynamics in European Electricity Markets”, JRC134300, European Commission, 2023.
See the article entitled “Energy price developments in and out of the COVID-19 pandemic – from commodity prices to consumer prices”, Economic Bulletin, Issue 4, ECB, 2022; and the article entitled “Geopolitical risk and oil prices” , Economic Bulletin, Issue 8, ECB, 2023.
See Draghi, M., “The future of European competitiveness”, September 2024.
For example, in 2022 the EU was reliant on imports for 62.5% of its energy needs. Import dependency was particularly high for natural gas (97.6%) and oil and petroleum products (97.7%). In contrast, the United States was a net energy exporter. See “Energy statistics – an overview”, Eurostat, May 2024; and “U.S. energy facts explained”, US Energy Information Administration, July 2024.
Over the period, investment by Compustat firms was on average equivalent to approximately 20% of total gross fixed capital formation and 55% of R&D investment at the European level.
See Hamilton, J.D., “This is what happened to the oil price-macroeconomy relationship”, Journal of Monetary Economics, Vol. 38, No 2, October 1966, pp. 215-220; and Raduzzi, R. and Ribba, A., “The macroeconomics outcome of oil shocks in the small Eurozone economies”, The World Economy, Vol. 43, No 1, January 2020, pp. 191-211.
Until 2015 the oil and gas markets were strongly linked. While they have gradually been decoupling in Europe since 2015, as the degree of indexation of gas contracts to oil prices has decreased, several studies suggest that such decoupling is not structurally complete. See the article entitled “Energy price developments in and out of the COVID-19 pandemic – from commodity prices to consumer prices”, op. cit.; Szafranek, K. and Rubaszek, M., “Have European natural gas prices decoupled from crude oil prices? Evidence from TVP-VAR analysis”, Studies in Nonlinear Dynamics & Econometrics, Vol. 28, No 3, June 2024, pp. 507-530; and Zhang, D. and Ji, Q., “Further evidence on the debate of oil-gas price decoupling: A long memory approach”, Energy Policy, Vol. 113, February 2018, pp. 68-75.
See Känzig, D.R., “The Macroeconomic Effects of Oil Supply News: Evidence from OPEC Announcements”, American Economic Review, Vol. 111, No 4, April 2021, pp. 1092-1125. Känzig proposes a novel method for identifying and quantifying oil supply news shocks by exploiting the high-frequency variation in oil futures prices surrounding OPEC announcements.
Alternative ways to identify oil supply shocks range from using a narrative shock series to structured vector autoregressions (VARs) identified with sign restrictions. See, for instance, Caldara, D., Cavallo, M. and Iacoviello, M., “Oil price elasticities and oil price fluctuations”, Journal of Monetary Economics, Vol. 103(C), May 2019, pp. 1-20; and Kilian, L., “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market”, American Economic Review, Vol. 99, No 3, June 2009, pp. 1053-1069. However, these measures lack the forward-looking dimension that characterises oil news shocks.
The shock is identified using instrumental variables within a VAR; hence it is identified up to sign and scale. To facilitate the interpretation of the results, in the article the oil supply news shock series is normalised to increase PPI energy by 1% on impact, which corresponds to a shock size of slightly above one standard deviation.
IPP pertains to investment in intangible assets, including R&D, software and databases, mineral exploration, and entertainment, literary and artistic originals.
The results are robust to the exclusion of the pandemic and the recent energy crisis, namely data after 2020.
Capital expenditure pertains to long-term fixed assets owned by companies and used to produce goods or provide services, including land, buildings, machinery, vehicles and equipment.
Not every country in the sample reports fixed capital expenditure at NACE 2 level, which is required to distinguish between energy-intensive and non-energy-intensive sectors. Therefore, the figure of 12% is calculated only on the sub-sample of countries for which this information is available, namely: Belgium, Bulgaria, Czech Republic, Denmark, Greece, Cyprus, Latvia, Hungary, Austria, Portugal, Romania, Slovakia, Finland, Sweden, Norway and the United Kingdom.
According to the European Commission’s Annual Single Market Report 2021, EIIs encompass several manufacturing sectors, including wood and wood products (excluding furniture), straw and plaiting materials, paper and paper products, coke and refined petroleum, chemicals and chemical products, rubber and plastic products, other non-metallic mineral products and basic metals.
For instance, every €100 of downstream private sector production contains on average €5 of inputs from chemicals, minerals and basic metals (see Draghi, M., op. cit.).
See Dashboard for energy prices in the EU and main trading partners 2023, European Commission. For example, between 2020 and mid-2022 the retail prices of electricity and natural gas (excluding recoverable taxes and levies) for EU firms were, on average, more than double the prices paid by their US counterparts. The retail price of diesel (including taxes) in the EU was slightly less than double the price in the United States.
For an overview, see Cloyne, J., Ferreira, C., Froemel, M. and Surico, P., “Monetary Policy, Corporate Finance, and Investment”, Journal of the European Economic Association, Vol. 21, No 6, December 2023, pp. 2586-2634.
See “EIB Investment Survey 2024 – European Union overview”, op. cit.
See, for example, Durante, E., Ferrando, A. and Vermeulen, P., “Monetary policy, investment and firm heterogeneity”, European Economic Review, Vol. 148, 104251, 2022; and Cloyne, J. et al., op. cit.
See “EIB Investment Survey 2023 – European Union overview”, op. cit.
The difference between the groups in panels a) and d) in Chart 5 is statistically significant on impact and after one year.
See Draghi, M., op. cit.
See Letta, E., “Much More Than a Market – Speed, Security, Solidarity: Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens”, April 2024; and Draghi, M., op. cit.

 
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