Developed countries provided and mobilised USD 115.9 billion in climate finance for developing countries in 2022, exceeding the annual 100 billion goal for the first time and reaching a level that had not been expected before 2025.
According to new figures from the OECD, in 2022 climate finance was up by 30% from 2021, or by USD 26.3 billion. This is the biggest year-on-year increase to date and means that the 100 billion mark was reached a year earlier than the OECD had previously projected, albeit two years later than the initial target date of 2020.
 
Climate Finance Provided and Mobilised by Developed Countries in 2013-2022 is the OECD’s seventh assessment of progress towards the UNFCCC goal, agreed in 2009, of mobilising USD 100 billion a year by 2020 – a commitment later extended through to 2025 – to help developing countries mitigate and adapt to climate change. It comes as UNFCCC discussions are under way to set a New Collective Quantified Goal (NCQG) on climate finance for the post-2025 period, taking into account developing countries’ needs and priorities as well as the evolving global economic landscape.
“It is good to see that developed countries have exceeded the USD 100 billion goal in 2022. Exceeding this annual commitment materially by more than 15% is an important and symbolic achievement which goes some way towards making up for the two year delay, which should help build trust. We encourage developed countries to keep up the momentum, also to leverage it further with additional policy efforts to boost private climate finance,” OECD Secretary-General Mathias Cormann said. “It will be important to sustain this level of elevated support through to 2025 while also increasing our ambition for the new post-2025 goal. Multilateral providers and the private sector will be key to further bridging the investment gap, notably in areas such as clean energy, agriculture and resilience. For the post-2025 period, the scope and design of the New Collective Quantified Goal on climate finance must be more comprehensive and effective than the existing goal by optimising the roles of different actors, finance sources, and policy incentives in order to address the scale and range of climate-related finance needs.”
Additional OECD analysis published this week highlights the need for the NCQG on climate finance to reflect and incentivise contributions from a broad range of sources in line with the scale of investment needed to achieve the Paris Agreement’s goals. The report explores ways the new goal could incorporate elements relating to public interventions that can either directly finance climate action or help mobilise private climate finance. It also discusses options for factoring in elements related to the quality of finance, as well as addressing key issues faced by developing countries such as access to finance and the sustainability of debt.
The 2022 climate finance data shows that public funds, from both bilateral and multilateral channels, continue to make up the bulk of climate finance, accounting for 80% of the total. Over the period recorded, multilateral public climate finance showed the biggest rise, up by USD 35 billion or 226% since 2013. The 2022 growth in public climate finance was accompanied by a jump of 52%, or USD 7.5 billion, in mobilised private finance, which reached USD 21.9 billion in 2022 after several years of relative stagnation.
The figures also show an uptick in climate finance destined for adaptation action. Following a small drop in 2021, adaptation finance reached USD 32.4 billion in 2022, three times the 2016 level. The amount of public adaptation finance tracked by the OECD in 2019 was USD 18.8 billion and USD 20.3 billion with mobilised private finance included. Based on these figures, in 2022, developed countries were about halfway towards meeting the 2019 COP26 Glasgow Climate Pact’s call to double the provision of adaptation finance by 2025.
As with previous OECD assessments, this year’s edition provides insights relating to financial instruments as well as geographical distribution of climate finance. It shows that loans continue to represent the lion’s share of public climate finance, especially for multilateral development banks that typically finance large infrastructure projects, although grants are being prioritised in lower-income countries. The mix is more balanced for multilateral climate funds and bilateral providers, owing to a larger and more diverse range of activities and projects. Between 2016 and 2022, grants increased by USD 13.4 billion (more than doubling with an increase of 109%) and public loans by USD 30.3 billion (up 91%).
Climate finance to low-income countries remained relatively low at 10% in 2022. Importantly, however, least developed countries (LDCs) and small island developing states (SIDS), benefitted from a larger amount of finance for adaptation (about 50%) than the average for all developing countries (25%). On the other hand, private mobilised finance for LDCs and SIDS was very limited, underscoring the need for tailored international support to help address the challenges faced by these countries in attracting private investment for climate action.
The OECD will continue to track the fulfillment of the USD 100 billion goal through to 2025 as well as, pending the outcome of COP29 in Baku, contributing to international efforts to implement the NCQG in an effective way.
 
View full press release here
 
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Meeting the continent’s emission reduction targets could enhance energy security metrics by 8 percent by 2030—and that would be just the start
Blog post by Geoffroy Dolphin, Romain Duval, Galen Sher, Hugo Rojas-Romagosa | Russia’s invasion of Ukraine triggered Europe’s worst energy crisis since the 1970s and put energy security back at the top of the policy agenda.
Policymakers reacted swiftly by securing alternative natural gas supplies, improving energy efficiency, and expanding renewables. Reducing greenhouse gas emissions would, they said, not only mitigate climate change but also strengthen energy security. Skeptics, however, countered that this approach would increase the cost of energy, phase out safe (albeit dirty) domestic coal more rapidly, and ultimately weaken the continent’s energy security.
So, which view is correct? Our new research shows that boosting Europe’s climate action delivers sizable energy security benefits, too.
We weigh the effects of climate action on energy security in a global economic model with many countries and sectors. It simulates the impacts of policies to reduce emissions on two essential security measures.
The first measure, security of supply, assesses the risk of a disruption to energy supply by combining how dependent a country is on imports for its energy consumption with how diversified those energy imports are. The second is the resilience of its economy to an energy disruption, represented by the share of gross domestic product it spends on energy.
Strikingly, our analysis reveals that Europe’s energy security deteriorated in the decades before Russia’s invasion of Ukraine, as countries relied increasingly on imports from ever fewer suppliers.

The simulations also show that higher carbon prices, stronger sector-specific energy efficiency regulations, and accelerated permitting for renewables would all improve Europe’s energy security along these two key metrics. Effects would differ across policies, however:

Carbon pricing cuts emissions at the lowest output cost to the economy but may take time to improve energy security in some energy- and emission-intensive economies in Central and Eastern Europe, if used as the only emission-reduction tool. This is partly because these countries would have to phase out domestic coal sooner than otherwise.

Stronger energy-efficiency regulations for transport and buildings, by contrast, are less efficient than carbon pricing in cutting emissions, but they deliver larger energy security co-benefits. They also spread those benefits more evenly across countries. Such regulations lower the consumption of energy, just as carbon pricing does, but they tend to reduce the price of energy—and thereby overall energy expenditures—more. Combining them with support to poorer households—for purchases of more energy-efficient vehicles and domestic heating systems, for example—would make them more palatable and thereby speed up implementation.

Accelerated permitting for renewables also improves energy security widely across Europe by expanding domestic energy supply.

Packaging climate policies
A climate policy package that includes all these tools is the most promising way forward because it combines the economic efficiency of carbon pricing with the larger and more evenly shared energy security benefits of regulations.
Specifically, a package of measures improves energy security in three ways. First, it lowers dependence on imports by replacing imported fossil fuels with domestically produced renewable electricity.
Second, it diversifies individual economies’ energy imports away from non-European suppliers toward European ones—through enhanced penetration of renewables and electrification of end uses such as vehicles and house heating systems, in particular, given that European countries predominantly trade electricity with their European neighbors.
And third, it lowers energy expenditures because efficiency investments reduce demand and accelerated renewables deployment raises energy supply—both of which lead to lower energy prices. This more than offsets the higher cost from higher carbon pricing.
An illustrative policy package that cuts emissions by 55 percent compared to 1990 levels would improve the two energy security metrics by close to 8 percent by 2030 for Europe as a whole.

For the European Union, this package, which is consistent with the “Fit-for-55” agenda, would reverse 13 years of deterioration in economic resilience to energy disruptions and eight years of reduction in security of energy supply. As Europe continues to ramp up its climate policy action beyond 2030, these gains would only increase.
Multilateral cooperation
The simulations also support the case for strong multilateral cooperation within Europe, given that countries differ in their energy security gains and emission reduction costs (which, in turn, reflect factors such as their current energy intensity, energy mix, and potential for renewable power generation). A common facility that would pool resources and coordinate green investments at the EU level could accelerate the green transition at low cost while distributing its gains more evenly, including by tapping cheap abatement options in emerging EU member countries.
Completing the EU’s energy union strategy is a case in point: better connecting national grids would lower costs and help individual countries import electricity from other member countries in the event of domestic disruptions, improving energy security for all.
At a time when the momentum behind climate action is at risk of fading, European policymakers should consider its full benefits. By ramping up their individual emission reduction policies as planned and strengthening their cooperation, not only will they remain global leaders on the path toward net zero emissions by 2050, but they will also secure abundant and safe energy supply to power their economies into the future.
 
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Full post can be found here
 
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Blog post by Sarah Holton and Gerrit Koester | The ECB wage tracker – an important tool used to assess wage developments across the euro area – is signalling that overall wage pressures have moderated since 2023. At the same time wage growth is expected to remain elevated in 2024, and to show a bumpy profile. These developments reflect the staggered nature of the wage adjustment process as workers continue to recoup real wage losses from past price shocks, as well as the important role of one-off payments in this process. Such one-off payments are also behind the increase in euro area negotiated wage growth in the first quarter. This Blog discusses the latest data on wage pressures and the signals for future wage growth from the ECB wage tracker.
Growth in overall wages – which can be measured by compensation per employee (CPE)[2] – has been elevated in the euro area since 2021 and reached 5.2% in 2023, its highest annual rate since the start of the euro. Given the links to inflation – via demand and cost-push channels – wages are closely monitored by central banks. In view of the importance of labour input costs in the services sector, wages are particularly important for services inflation.[3] Services inflation largely reflects domestic inflationary pressures and is tightly linked to wage growth in the medium term, which means that the outlook for wage growth is especially crucial for the domestic inflation outlook.
The increase in wage growth after the pandemic was initially driven primarily by wage drift (Chart 1).[4] Wage drift reflects elements not agreed via collective bargaining, such as individual bonus payments or changes in overtime, and therefore it usually reacts quickly to changes in economic conditions.[5] In the post-pandemic inflation surge, the strong increase in wage drift also reflected ad hoc one-off payments. These are aimed at compensating employees for the increase in inflation that was not expected when the previous wage agreements were reached.[6] While wage drift contributed more than two-thirds (around 3 percentage points) to overall wage growth in 2021, its contribution decreased substantially over 2022 and 2023 to only 0.4 percentage points in the fourth quarter of 2023. This made negotiated wage growth the main driver of more recent overall euro area wage growth.[7]

Chart 1

Decomposition of compensation per employee (CPE) growth in the euro area

(annual percentage changes; p.p. contributions)

Sources: Eurostat and ECB staff calculations.
Latest observations: 2023 Q4 for CPE and 2024 Q1 for negotiated wages.

As collective wage bargaining in the euro area as a whole covers around 80% of total employees and negotiated wages account for the lion’s share of compensation per employee (CPE), negotiated wage growth is the main determinant of euro area wage developments in the medium term.[8] Given the staggered, infrequent and decentralised nature of wage-setting in euro area countries and the relatively long duration of wage contracts (two years on average), negotiated wage growth reacts only sluggishly to changes in economic conditions and shows a high level of persistence.
Developments in negotiated wages can be monitored by the ECB’s indicator of euro area negotiated wage growth, which has been compiled since 2001 and is based on data from nine countries: Belgium, Germany, Spain, France, Italy, Netherlands, Austria, Portugal and Finland. The indicator is published on a quarterly basis and includes structural wage increases as well as one-off payments.[9] Euro area negotiated wage growth including one-off payments increased from 1.4% in 2021 to 4.5% in 2023 – with inflation catch-up being a central motive in wage negotiations recently. The latest release saw an increase in negotiated wage growth in the first quarter of 2024 to 4.7% – after it slightly moderated from 4.7% in the third quarter of 2023 to 4.5% in the fourth quarter of 2023 (Chart 1). This signals that negotiated wage growth has remained elevated in the euro area. The newly-developed ECB wage tracker can help to interpret these latest signals and put them into perspective.
Interpreting recent developments in negotiated wage growth
The ECB and the National Central Banks have developed a set of wage trackers, which rely on a new euro area database of individual wage agreements for seven euro area countries.[10] These trackers provide timely information on wage growth and they provide forward-looking information on the future wage increases embedded wage settlements, which often cover more than one year. In turn, this forward-looking information provides a leading indicator for future negotiated wage growth developments. Moreover, the trackers are built on granular information that allow for aggregations – for instance, according to the date of the wage agreement or the contract duration – that can provide additional and useful signals for interpreting wage dynamics. The database underlying these trackers is currently updated for each monetary policy meeting of the ECB’s Governing Council and this blog is based on the data available for the most recent Governing Council meeting in April 2024. Later in 2024, key wage tracker indicators for the euro area will be regularly published via the ECB’s data portal.

Chart 2

Wage growth in the euro area – comparing wage trackers and indicator of negotiated wages

Sources: Eurostat and ECB staff calculations.
Latest observations: 2024 Q1.
Notes: All series shown in the chart include only data from the six countries which are included in both the negotiated wage indicator and the wage tracker: Germany, France, Italy, Spain, the Netherlands and Austria. Wage trackers calculated based on micro data on wage agreements provided by Deutsche Bundesbank, Banco de España, the Dutch employer association (AWVN), Oesterreichische Nationalbank, Banca d’Italia, and Banque de France. The series “Negotiated wages using ECB wage tracker data” records one-off payments in full in the month in which they are disbursed, while the “ECB wage tracker including one-off payments” smooths the impact of one-off payments over a period of 12 months.

Zooming in on latest developments and on the countries for which both the negotiated wage and ECB wage tracker series are available, the ECB’s wage tracker (Chart 2 – dark blue line) moved sideways in the first quarter of 2024 while negotiated wage growth increased (Chart 2 – yellow line). There are differences in methodologies underlying the negotiated wage series and the wage tracker: while the series for negotiated wage growth includes one-off payments in full within the month of disbursement for some countries, the wage tracker smooths the impact of one-off payments over the twelve months after their payment date.[11] Since one-off payments often constitute a compensation for lower structural wage increases, it makes sense to smooth their impact in forward-looking indicators to give a more comprehensive signal about wage pressures.[12] Smoothing reduces the volatility of the wage tracker (especially in monthly frequency) and creates a more reliable picture of the development of overall wage pressures from wage agreements. These differences mean that the two indicators do not always perfectly align: for instance in the first quarter of 2024, when one-off payments in the German public sector played an especially prominent role.[13] However, if we apply a methodology similar to that used to calculate negotiated wage growth, wage tracker data shows very similar developments (Chart 2 – light blue line). Overall, the wage tracker generally correlates closely with negotiated wages and is more timely, meaning that it is a useful leading indicator.

Chart 3

Forward-looking wage tracker for the euro area at different points in time

Sources: Eurostat and ECB staff calculations.
Latest observations: 2023 Q4.
Note: Calculated based on micro data on wage agreements provided by Deutsche Bundesbank, Banco de España, the Dutch employer association (AWVN), Oesterreichische Nationalbank, Bank of Greece, Banca d’Italia and Banque de France. One-off payments are spread over 12 months from the agreed disbursement date – smoothing the impact on wage growth. Coverage reflects the share of euro area employees covered by an active wage agreement that is included in the wage tracker database.

Monitoring the impact of the latest wage agreements on the outlook for negotiated wage growth can be done by comparing vintages of the forward-looking wage tracker for all active wage agreements (Chart 3). These are not forecasts, since they reflect only wage growth in those agreements that have already been reached and are set to remain active for some time into the future. Overall negotiated wage growth will also depend on contracts running out in the future, which will in turn depend on changes in the macroeconomic environment. The forward-looking wage tracker indicates that wage growth is expected to remain relatively elevated and quite bumpy over 2024 – with one-off payments contributing to this bumpiness.
But there have been important changes in recent months. At the time of the December 2023 Governing Council meeting, the average negotiated wage growth for 2024 in all active wage contracts stood at 4.7% (Chart 3 – dotted blue line). By the April Governing Council meeting, the ECB wage tracker included additional information on wage agreements covering around eleven million employees and accounting for around a fifth of the workers covered in our wage tracker. Integrating this additional information suggested lower wage growth of 4.1% on average in all active agreements for 2024 (Chart 3 – dashed blue line). The update for the upcoming Governing Council meeting in June 2024 will include additional information from data that has become available since the April Governing Council. While we expect this profile to change as new data become available, overall, the incoming data suggest that wage pressures from collective agreements have decreased in the euro area since the end of 2023.
Overall, negotiated wage growth is expected to remain elevated in 2024, which is in line with the persistence that has been factored into Eurosystem staff forecasts and reflects the multi-year adjustment process for wages. However, wage pressures look set to decelerate in 2024. ECB wage tracker data for the first few months of the year, when most agreements take place, indicate that negotiated wage pressures are moderating. This is supported by other indicators for wage pressures in the euro area.[14] The Indeed wage tracker based on job postings, which was developed with the Central Bank of Ireland, decreased from its peak of 5.1% in October 2022 to 3.4% in April 2024. Feedback from firms participating in the ECB’s corporate telephone survey in the March 2024 round indicates that companies expect wage growth to decrease from around 5.4% in 2023 to 4.3% in 2024.[15] Similarly, the ECB’s April 2024 Survey on the Access to Finance of Enterprises (SAFE) found that firms expect wages in the euro area to grow by 3.8% on average over the next 12 months – down from 4.5% in the autumn 2023 wave of the SAFE.[16]
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.
For more information, please Check out The ECB Blog.
 
Footnotes:

B Blog and subscribe for future posts.

Matthias Bing and Marc Roca I Llevadot co-authored the Blog and provided excellent research assistance. Thanks to Oscar Arce and ECB colleagues for their comments.
CPE is based on national accounts data and the ECB’s main wage growth measure. It is a comprehensive indicator reflecting the labour costs payable by employers (including wages, salaries and employers’ social contributions) expressed as an average per employee.
See for the cost share of wages in services inflation Fagandini, B. et al. (2024): Decomposing HICPX inflation into energy-sensitive and wage-sensitive items, Economic Bulletin, Issue 3, ECB.
Aggregate wage drift is not directly observable and is usually proxied by the difference between the growth rate of gross wages and salaries per employee and the growth rate of negotiated wages.
For details see Koester, G. and Guillochon, J. (2018): “Recent developments in the wage drift in the euro area,” Economic Bulletin Issue 8, ECB.
See for details Bodnár, K, Gonçalves, E., Górnicka L. and G. Koester (2022): Wage developments and their determinants since the start of the pandemic, Economic Bulletin, Issue 8, ECB.
CPE growth for the euro area for the first quarter of 2024 is foreseen to be published on 7 June 2024.
See chapter 2 in Gornicka, L. and G. Koester (eds) (2024): “A forward-looking tracker of negotiated wages in the euro area”, Occasional Paper Series, No 338, ECB.
For further details on the indicator of negotiated wages see Kanutin A. (2015), “The ECB’s experimental indicator of negotiated wages”, manuscript available here or Gornicka, L. and G. Koester (eds) (2024): A forward-looking tracker of negotiated wages in the euro area”, Occasional Paper Series, No 338, ECB.
The ECB wage tracker is so far based on data from seven euro area countries (Germany, Spain, France, Italy, Netherlands, Austria and Greece – accounting for around 87% of compensation of employees in the euro area) while the nine countries included in the indicator of negotiated wage growth account for around 94% of compensation of employees in the euro area. The inclusion of additional euro area countries in the euro area wage tracker is on-going. For details see Gornicka and Koester (op cit.) – table 2.
Eurostat also includes one-off payments in full within the month of disbursement when calculating compensation per employee.
These inflation compensation payments have been especially wide-spread and important in Germany – as these were income tax exempt up to 3000 euro per employee over the period from October 2022 to end-2024. By March 2024 more than three-quarters of all employees covered by collective agreements in Germany had received an average inflation compensation payment of €2,761.
Employees in the public sector of the German states received a one-off inflation compensation payment of €1,920 in the first quarter of 2024.
See Disinflation in the euro area: an update speech by Philip R. Lane at the University College Dublin Economics Society; Dublin, 15 April 2024.
Based on simple averages of the quantitative indications provided. For details see: Healy, P., Kuik, F., Morris, R. and M. Slavik (2024)“Main findings from the ECB’s recent contacts with non-financial companies” ECB Economic Bulletin, Issue 3/2024.,
See Survey on the Access to Finance of Enterprises in the euro area – first quarter of 2024.

 
 
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Proposed CHIPS Investment Would Support Construction of New Manufacturing Facility and Over 1,200 Jobs in Covington, Georgia
Today, the Biden-Harris Administration announced that the U.S. Department of Commerce and Absolics, an affiliate of the Korea-based SKC, have signed a non-binding preliminary memorandum of terms (PMT) to provide up to $75 million in direct funding under the CHIPS and Science Act to help advance U.S. technology leadership. The proposed CHIPS investment would support the construction of a 120,000 square-foot facility in Covington, Georgia and the development of substrates technology for use in semiconductor advanced packaging. The proposed investment with Absolics is the first proposed CHIPS investment in a commercial facility supporting the semiconductor supply chain by manufacturing a new advanced material.
“An important part of the success of President Biden’s CHIPS program is ensuring the United States is a global leader in every part of the semiconductor supply chain, and the advanced semiconductor packaging technologies Absolics is working on will help to achieve that goal, while also creating hundreds of jobs in Georgia,” said U.S. Secretary of Commerce Gina Raimondo. “Through this proposed investment in Absolics, the Biden-Harris Administration is helping accelerate innovation, advance U.S. technological leadership in semiconductor manufacturing, and generate economic opportunity in the Atlanta area and throughout the state.”
Because of President Biden’s CHIPS and Science Act, this proposed investment would support over an estimated 1,000 construction jobs and approximately 200 manufacturing and R&D jobs in Covington and enhance innovation capacity at Georgia Institute of Technology (Georgia Tech), supporting the local semiconductor talent pipeline. Started through a collaboration with the 3D Packaging Research Center at Georgia Tech, Absolics’ project serves as an example of American lab-to-fab development and production.
“Since Day One of this Administration, President Biden has committed to growing the economy from the middle-out and bottom-up,” said Chief Economist of the Investing in America Cabinet Heather Boushey. “He passed historic legislation to invest in America – the American Rescue Plan, the Bipartisan Infrastructure Law, the Inflation Reduction Act, and the CHIPS and Science Act – rebuilding our infrastructure, lowering costs, and creating opportunities for families, workers, and businesses. This new agreement with Absolics is going to help us meet the demand for the technology of tomorrow while supporting good-paying jobs in Georgia today.”
Absolics glass substrates will be used as an important advanced packaging technology to increase the performance of leading-edge chips for AI, high-performance compute and data centers by reducing power consumption and system complexity. The glass substrates produced by Absolics enable smaller, more densely packed, and shorter length connections resulting in faster and more energy efficient computing. Currently, the advanced packaging substrates market is concentrated in Asia, and, because of this proposed CHIPS investment, U.S.-based companies would have an expanded domestic supply of glass substrates for advanced packaging.
Advanced packaging is an essential component for U.S. companies to improve semiconductor applications. The path to advanced packaging starts with substrates, which are the foundations on which systems are built. More capable substrates open the door to innovation at every other level in the packaging process. The company will continue its R&D work with Georgia Tech, while also collaborating on projects related to the Department of Defense’s “State-of-the-Art” Heterogeneous Integrated Packaging (SHIP) program in RF technologies. Absolics commitment to working with and developing local talent also includes a partnership with Georgia Piedmont Technical College to provide work-ready education and hands-on skill training.
“Creating a broad-based advanced packaging ecosystem is crucial to the success of revitalizing the U.S. semiconductor industry and this all begins with substrates,” said Under Secretary of Commerce for Standards and Technology and National Institute of Standards and Technology Director Laurie Locascio. “Supporting innovation of the substrate can improve performance and reduce power needs in advanced packaging technologies which are critical to the needs of artificial intelligence capabilities and high-performance compute.”
“With the support of this proposed CHIPS funding, Absolics would be able to fully commercialize our pioneering glass substrate technology for use in high-performance computing and cutting-edge defense applications. This effort is an important component of establishing a robust semiconductor advanced packaging ecosystem in the State of Georgia and restoring the U.S.’s leadership in semiconductor industry. Our new facility in Covington will not only enhance our ability to produce high-quality glass substrates but also create high-skilled jobs and drive innovation through our partnership with Georgia Tech,” said Absolics CEO Jun Rok Oh. “Absolics is proud to contribute to the resilience and competitiveness of the American semiconductor industry.”
As explained in its first Notice of Funding Opportunity, the Department may offer applicants a PMT on a non-binding basis after satisfactory completion of the merit review of a full application. The PMT outlines key terms for a potential CHIPS incentives award, including the amount and form of the award. The award amounts are subject to due diligence and negotiation of award documents and are conditional on the achievement of certain milestones. After the PMT is signed, the Department begins a comprehensive due diligence process on the proposed projects and continues negotiating or refining certain terms with the applicant. The terms contained in any final award documents may differ from the terms of the PMT being announced today.

About CHIPS for America
The Department has received more than 660 statements of interest, more than 220 pre-applications and full applications for NOFO 1, and more than 160 small supplier concept plans for NOFO 2. The Department is continuing to conduct rigorous evaluation of applications to determine which projects will advance U.S. national and economic security, attract more private capital, and deliver other economic benefits to the country. The announcement with Absolics is the ninth PMT announcement the Department of Commerce has made under the CHIPS and Science Act, with additional PMT announcements expected to follow throughout 2024.
CHIPS for America is part of President Biden’s economic plan to invest in America, stimulate private sector investment, create good-paying jobs, make more in the United States, and revitalize communities left behind. CHIPS for America includes the CHIPS Program Office, responsible for manufacturing incentives, and the CHIPS Research and Development Office, responsible for R&D programs, that both sit within the National Institute of Standards and Technology (NIST) at the Department of Commerce. NIST promotes U.S. innovation and industrial competitiveness by advancing measurement science, standards, and technology in ways that enhance economic security and improve our quality of life. NIST is uniquely positioned to successfully administer the CHIPS for America program because of the bureau’s strong relationships with U.S. industries, its deep understanding of the semiconductor ecosystem, and its reputation as fair and trusted. Visit www.chips.gov to learn more.
 
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When Russia invaded Ukraine, and turned its energy resources into an economic weapon against Europe, our reaction was rapid and robust. We adopted the REPowerEU Plan to end Europe’s dependency on Russian fossil fuels.
Two years later, the results of our collective efforts are clear to all. We have made a massive cut in Russian energy imports, squeezing the Kremlin’s war economy and standing in solidarity with our Ukrainian friends. We have worked with reliable international partners to replace Russian imports where needed, including through joint purchasing under the EU Energy Platform. We have strived together as Europeans to reduce our energy demand, and we have invested to accelerate the replacement of imported fossil fuels with home-grown renewable energy. These efforts have resulted in an unprecedented roll-out of renewable energy and a historic realignment of our energy supplies.
When Russia’s actions drove a sharp increase in energy prices in the summer of 2022, we agreed a wide range of measures to secure our energy supply and to stabilise the markets. Prices are now back around pre-war levels.
We have broken our energy dependency on Russia, and Putin’s pipelines are no longer a tool of blackmail against Europe.
We have truly REPowered Europe, redrawn the energy landscape, and made a big step forward on Europe’s green transformation.
Now, we are pressing ahead with our efforts to completely phase out Russian fossil fuel imports, and to provide more secure, clean and affordable energy to European citizens and to strengthen the competitiveness of our industries.
 
 
You can read the full statement here.
 
 
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Blog post by Omiros Kouvavas, Athanasios Tsiortas | Recent results from the ECB’s Consumer Expectations Survey (CES) show a substantial increase in the share of consumers who applied for credit. This may seem surprising as currently borrowers have to pay higher interest rates and banks are providing less credit than in previous years. What are the main drivers behind this dynamic? CES microdata suggests there have been significant shifts in the composition of consumer groups applying for credit. Higher-income consumers now apply for new loans less often, while lower-income households apply for them more often, in particular consumer credit. In turn, banks now reject a higher share of applications. This post discusses what this new makeup of the credit application pool means for the interpretation of banks’ tightening of credit standards and credit issuance to households.
Who is applying for loans?
The credit application rate decreased somewhat from April 2021, to a low of 12.6% in July 2022 (Chart 1). Since then it has gradually increased to roughly 17% at the beginning of 2024.[1] The application rate for the top 20 percent of income earners has been steadily decreasing. For the bottom 50 percent of the income distribution, on the other hand, there was a notable increase in the loan application rate.

Chart 1
Credit application rate over time – by household income group

Percentage of consumers

Source: ECB Consumer Expectations Survey, Jan 2024.
Notes: Weighted estimates. Average credit application rate over time defined as having submitted at least one credit application over the last 3 months. The question reads: “During the last 3 months, has your household applied for any of the following?”. Categories include applications for a mortgage, car loan, consumer loan, leasing contract, credit card, education loan, limit increase, refinancing mortgage. Note that the sample size of the CES increased from six to eleven countries as of April 2022. The overall picture of the depicted aggregate series remains the same if we exclude the additional five countries from the sample.

To better understand this trend of rising credit demand by lower income households – during a period in which loans become more expensive – we dug deeper into the application patterns across different types of credit. With this analysis we complement additional research that has investigated the heterogenous dynamics in credit applications and rejections over time.
Chart 2 shows the cumulative change in the application rate by loan category between April 2022 and January 2024. The category with the highest increase is consumer credit among low-income households, which rose by 4.7 percentage points. At the same time, application rates for the top 20% of income earners decreased for almost every type of credit.

Chart 2
Change in credit application rates since April 2022 – by household income group and credit type

Cumulative change in percentage points

Source: ECB Consumer Expectations Survey, Jan 2024.
Notes: Weighted estimates. The chart depicts the cumulative change in the application rate for specific categories of credit in the period between April 2022 and January 2024. The application rate is defined as having submitted at least one credit application over the last 3 months. The category consumer credit includes both outright consumer loans and credit cards. The question reads: “During the last 3 months, has your household applied for any of the following?” Response option categories include applications for a mortgage, car loan, consumer loan, leasing contract, credit card, education loan, limit increase, refinancing mortgage. Categories with smaller prevalence are not included in this chart.

This confirms that the increase in the overall application rate is driven by lower-income households applying for consumer loans in particular. Previous work at the ECB documented the higher financial burden that lower-income households have faced as a consequence of the increase in energy prices and the subsequent inflationary environment. Moreover, recent work has also shown that consumers react in different ways to this burden, for example by adjusting their consumption patterns across different margins or by revising their savings and lending behaviour.
Increasing share of rejected credit applications
At the same time, banks are rejecting more loan applications. Chart 3 shows the gradual increase in credit applications that were either fully rejected or only partially accepted (yellow line). This share increased by 5.7 percentage points since April 2022. Meanwhile, the overall share of acceptances (blue line) decreased sequentially by 5.2 percentage points over the same period.

Chart 3
Credit application outcomes over time

Percentage of consumers among credit applicants

Source: ECB Consumer Expectations Survey, Jan 2024.
Notes: Weighted estimates. Three-quarter moving-average of the application outcome rate. Respondents additionally have the option to indicate that their application outcome is still unknown (share not depicted here). For only one loan application the question reads: “We would also like to know if this application was granted?”, if more than one “Thinking about your most recent application, was this application granted?”.

Chart 4 shows that the average share of credit applicants who faced a full-scale rejection (yellow bar) or partial acceptance (blue bar) over the past two years was always higher for consumers from the lower half of the income distribution. This was the case both for mortgage applications and consumer credit applications, while the average rejection rate of the latter category was generally higher for both income groups.

Chart 4
Credit application outcomes – by household income group and type of credit

Percentage of consumers among credit applicants

Source: ECB Consumer Expectations Survey, Jan 2024.
Notes: Weighted estimates. Average application outcome rate over the period April 2022 to January 2024. Outcomes can also still be unknown. Applications for consumer credit (right-hand side) include the categories consumer loan and credit card or overdraft facility. For only one loan application the question reads: “We would also like to know if this application was granted?”, if more than one “Still thinking about your most recent application, was this application granted?”

What this says about banks’ lending behaviour
In the latest rounds of the ECB Bank Lending Survey banks indicated that increased risk perceptions are one of the main drivers of tighter standards for lending to households. Insights from the CES might give us some indication as to why banks perceive the risks associated with lending as being higher. Historically, banks are more likely to reject applications from lower-income consumers. Since the composition of loan applications has shifted to include more risky consumer credit applications by lower-income households, the overall rejection rate of credit applications increases mechanically – even if credit standards remain unchanged. Increased risk perceptions may also be the result of banks receiving more loan applications that would always have been considered riskier.
From an overall credit provision perspective, this translates into an increasingly difficult credit access for households that may be attributed to changes in the credit application composition rather than tightening credit standards.
Conclusion
We find that the recent surge in credit applications is mainly driven by households from the lower half of the income distribution, particularly those applying for consumer credit. This shift in the composition of loan applications may have caused banks to perceive lending risk as higher than before. Indeed, rejection rates for mortgages and consumer credit, which are generally higher for lower-income consumers, have increased as well. Overall, the observations we document also contribute to understanding how the current tightening cycle is passed on to different household groups with respect to their participation in the credit market.
 
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.
For more information, please Check out The ECB Blog.
 
Footnotes:

Note that in April 2022 the number of countries covered by the CES increased from the largest six to the largest eleven euro area countries. The results and main take-aways from this ECB blog remain broadly unchanged if we restrict our analysis to the initial six CES countries.

 
 
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Today, as the AI Seoul Summit begins, U.S. Secretary of Commerce Gina Raimondo released a strategic vision for the U.S. Artificial Intelligence Safety Institute (AISI), describing the Department’s approach to AI safety under President Biden’s leadership. At President Biden’s direction, the National Institute of Standards and Technology (NIST) within the Department of Commerce launched the AISI, building on NIST’s long-standing work on AI. In addition to releasing a strategic vision, Raimondo also shared the Department’s plans to work with a global scientific network for AI safety through meaningful engagement with AI Safety Institutes and other government-backed scientific offices, and to convene the institutes later this year in the San Francisco area, where the AISI recently established a presence.
“Recent advances in AI carry exciting, lifechanging potential for our society, but only if we do the hard work to mitigate the very real dangers of AI that exist if it is not developed and deployed responsibly. That is the focus of our work every single day at the U.S. AI Safety Institute, where our scientists are fully engaged with civil society, academia, industry, and the public sector so we can understand and reduce the risks of AI, with the fundamental goal of harnessing the benefits,” said U.S. Secretary of Commerce Gina Raimondo. “The strategic vision we released today makes clear how we intend to work to achieve that objective and highlights the importance of cooperation with our allies through a global scientific network on AI safety. Safety fosters innovation, so it is paramount that we get this right and that we do so in concert with our partners around the world to ensure the rules of the road on AI are written by societies that uphold human rights, safety, and trust.”
Commerce Department AI Safety Institute Strategic Vision
The strategic vision released today, available here, outlines the steps that the AISI plans to take to advance the science of AI safety and facilitate safe and responsible AI innovation. At the direction of President Biden, NIST established the AISI and has since built an executive leadership team that brings together some of the brightest minds in academia, industry and government.
The strategic vision describes the AISI’s philosophy, mission, and strategic goals. Rooted in two core principles—first, that beneficial AI depends on AI safety; and second, that AI safety depends on science—the AISI aims to address key challenges, including a lack of standardized metrics for frontier AI, underdeveloped testing and validation methods, limited national and global coordination on AI safety issues, and more.
The AISI will focus on three key goals:

Advance the science of AI safety;
Articulate, demonstrate, and disseminate the practices of AI safety; and
Support institutions, communities, and coordination around AI safety.

To achieve these goals, the AISI plans to, among other activities, conduct testing of advanced models and systems to assess potential and emerging risks; develop guidelines on evaluations and risk mitigations, among other topics; and perform and coordinate technical research. The U.S. AI Safety Institute will work closely with diverse AI industry, civil society members, and international partners to achieve these objectives.
Launch of International Network of AI Safety Institutes
Concurrently, today Secretary Raimondo announced that the Department and the AISI will help launch a global scientific network for AI safety through meaningful engagement with AI Safety Institutes and other government-backed scientific offices focused on AI safety and committed to international cooperation. Building on the foundational understanding achieved by the Republic of Korea and our other partners at the AI Seoul Summit through the Seoul Statement of Intent toward International Cooperation on AI Safety Science, this network will strengthen and expand on AISI’s previously announced collaborations with the AI Safety Institutes of the UK, Japan, Canada, and Singapore, as well as the European AI Office and its scientific components and affiliates, and will catalyze a new phase of international coordination on Al safety science and governance. This network will promote safe, secure, and trustworthy artificial intelligence systems for people around the world by enabling closer collaboration on strategic research and public deliverables.
To further collaboration between this network, AISI intends to convene international AI Safety Institutes and other stakeholders later this year in the San Francisco area. The AISI has recently established a Bay Area presence and will be leveraging the location to recruit additional talent.
 
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A soft landing for Europe’s economies—bringing inflation back to target with a moderate economic cost in terms of growth—is within reach, but crosswinds could make it difficult to achieve price stability while securing a lasting recovery.
Over the next few quarters, cooling yet still-strong labor markets are expected to support real income growth and consumption. The recovery of consumption will help offset the effects of the needed withdrawal of fiscal support and galvanize investment as monetary policy eases. Against the backdrop of gradually strengthening private demand, durable disinflation will require a rebound in labor productivity, with profit margins returning to precrises levels. In advanced European economies, risks to the soft landing are balanced. For many economies in the Central, Eastern, and Southeastern Europe (CESEE) region, risks are one-sided amid still-high wage growth, stickier core inflation, and persistently high inflation expectations.
Delivering a soft landing is not the only task that needs urgent attention. Europe’s per capita income levels are well behind the global frontier, and this gap is not expected to close over the forecast horizon. Productivity growth has slowed, and aging is a major drag. The CESEE region, where private investment was already low before the pandemic and Russia’s invasion of Ukraine, has seen relative wage levels rising, pressuring competitiveness. Across the continent, geoeconomic fragmentation is casting a shadow on old growth models. At the same time, rising long-term expenditure pressures due to aging populations, climate ambitions, and ramped-up defense spending call for structural fiscal reforms and add to the urgency of raising growth sustainably.
Meeting these challenges will not be easy. Yet Europe has shown it can overcome even the most severe obstacles when acting decisively and together. With the right policies, policymakers can secure the soft landing and raise medium-term growth prospects.
The pace of monetary policy easing needs to match the evolution of underlying inflationary forces. In advanced European economies, a gradual, measured pace of easing is preferable under the baseline, ensuring that monetary conditions do not loosen too fast or too slowly. Many CESEE economies will need to maintain a tight stance for longer to fully rein in inflation. Fiscal support from the crises should be fully withdrawn in most of Europe, as shocks continue to fade and economies recover, without undermining public investment and social protection systems. Together with fiscal reforms, consolidation will strengthen fiscal sustainability, rebuild buffers against downside risks that would activate automatic stabilizers, and help create space to address spending needs related to aging, climate, and defense. In some countries, especially in the CESEE region, a less expansionary fiscal policy will help avoid further erosion of competitiveness. Property sector stress and rising bankruptcies could lead to larger-than-expected increases in nonperforming loans. Banks will need capital buffers strong enough to withstand an increase in nonperforming loans while, at the same time, leaving them in a position to support the projected increase in investment. Where pockets of financial vulnerabilities warrant tightening, care should be taken to avoid migration of risks to less-regulated nonbank financial institutions.
Raising potential growth prospects calls for efforts at both the domestic and European levels. Measures should aim to raise labor force participation, prepare the workforce for looming structural shifts, set an enabling environment for private investment, and promote innovation on a level European playing field—especially when it comes to the green transition, including through a strong commitment to carbon pricing. Greater European integration would amplify the effect of these reforms. Formulating an ambitious set of growth enhancing reforms should be a key priority of a new EU commission. Working together, EU member countries could substantially lift per capita incomes by addressing the remaining internal barriers that hamper the single market. Better capital allocation will require completing the banking and capital markets unions. Measures would include greater harmonization of national rules on taxes and subsidies, improving insolvency regimes, and reducing administrative burdens. There is also further room to lower effective barriers to labor mobility, and to goods and services trade.
 
Full report can be found here
 
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The EU economy staged a comeback at the start of the year, following a prolonged period of stagnation. Though the growth rate of 0.3% estimated for the first quarter of 2024 is still below estimated potential, it exceeded expectations. Activity in the euro area expanded at the same pace, marking the end of the mild recession experienced in the second half of last year. Meanwhile, inflation across the EU cooled further in the first quarter.
This Spring Forecast projects GDP growth in 2024 at 1.0% in the EU and 0.8% in the euro area. This is a slight uptick from the Winter 2024 interim Forecast for the EU, but unchanged for the euro area. EU GDP growth is forecast to improve to 1.6% in 2025, a downward revision of 0.1 pps. from winter. In the euro area, GDP growth in 2025 is projected to be slightly lower, at 1.4% – also marginally revised down. Importantly, almost all Member States are expected to return to growth in 2024. With economic expansion in the southern rim of the EU still outpacing growth in north and western Europe, economic convergence within the EU is set to progress further. On the 20th anniversary of the enlargement of the EU towards the east and the south, it is notable that, after almost stalling last year, economic convergence is also set to resume for the newer Member States. It is expected to continue at a sustained pace throughout the forecast horizon and beyond (see Special Topic).
HICP inflation is projected to continue declining over the forecast horizon. In the EU, it is now expected to decrease from 6.4% in 2023 to 2.7% in 2024 and 2.2% in 2025. In the euro area, it is forecast to fall from 5.4% in 2023 to 2.5% in 2024 and 2.1% in 2025. This is a downward revision compared to winter for both the EU and the euro area – especially for this year.
Economic activity broadly stagnated in 2023. Private consumption only grew by 0.4%. Despite robust employment and wage growth, labour incomes barely outpaced inflation. Moreover, households put aside a larger share of their disposable incomes than in 2022, as high interest rates kept the opportunity cost of consumption elevated, while high uncertainty, the erosion of the real value of wealth by inflation and the fall in real estate prices sustained precautionary savings. Investment grew by 1.5% in 2023, but largely driven by a sizeable carry-over from 2022. Especially towards the end of the year, weakness in investment was widespread across Member States and asset types, with a pronounced downsizing of the interest-rate-sensitive construction sector. External demand did not provide much support either, weighed down by a sharp slowdown in global merchandise trade. Still, with domestic demand stagnating, imports contracted more than exports, lifting the contribution of net external demand to real GDP growth to a sizable 0.7 pps. Last, but not least, the negative drag of an unusually strong inventory cycle detracted almost 1 pp. from domestic demand, and explains most of the over-estimation of real GDP growth in 2023 in previous forecasts. Meanwhile, HICP inflation has continued declining. From a peak of 10.6% in October 2022, inflation in the euro area is estimated to have reached 2.4% in April 2024. Inflation in the EU followed a similar path, with the March reading (April was still missing at the cut-off date of this forecast) coming in at 2.6%. Rapid fall in retail energy prices throughout 2023 was the main driver of the inflation decline, but underlying inflationary pressures started easing too in the second half of 2023, amidst the weak growth momentum.
Expectations for imminent and decisive rate cuts across the world have been pared back in recent weeks, as underlying inflationary pressures – especially in the US – have proved more persistent than previously expected. In the euro area, where the European Central Bank last hiked its policy interest rates in September 2023, markets now expect a more gradual pace of policy rate cuts than in winter. Euribor-3 months futures suggest that euro area short-term nominal interest rates will decrease from 4% to 3.2% by the end of the year and to 2.6% by the end of 2025.
Outside the euro area, central banks in some central and eastern European countries, as well as Sweden (after the cut-off date) have already embarked on a cycle of monetary policy easing.
Although retail interest rates have already started to come down, bank lending has so far failed to rebound, due to some further tightening of credit standards, but especially lower corporate demand for loans. However, as interest rates keep falling, the conditions for a gradual expansion of investment activity remain in place and are even bolstered by the robust financial deleveraging in preceding quarters.
With prolonged weakness in the manufacturing sector leaving many plants operating below normal capacity utilisation rates, equipment investment is expected to expand only marginally this year (see Box I.2.1), before accelerating in 2025. Non-residential construction investment is expected to remain resilient, largely reflecting government infrastructure spending with RRF support. By contrast, housing investment is projected to continue contracting this as continued fall in house prices and a still large build-up of inventories weigh on supply. The downsize of residential construction is set to continue in 2025, but the aggregate outlook masks significant variation across countries.
Despite largely stagnant output, the EU economy created more than two million jobs in 2023, thanks to broad-based employment growth across the EU. According to the Labour Force Survey, the employment rate of people aged 20-64 in the EU hit the new record high of 75.5% in the last quarter of 2023.
Notwithstanding evidence of cooling demand, the labour market remains tight. In March the EU unemployment rate stood at its record low of 6.0%, and other measures of labour market slack remain near record-low levels. Furthermore, the unemployment rate continued falling in Member States recording the highest rates, resulting in continued decline of dispersion across countries. This strong labour market performance reflects favourable developments in both labour demand and labour supply, also due to migration. Going forward, the impulse of these positive drivers is set to abate, and employment growth is expected to be more subdued. Over the forecast horizon, however, the EU economy is still expected to generate another 2.5 million jobs, while the unemployment rate should hover around the current record-low rates. Nominal compensation per employee expanded by 5.8% in 2023 in the EU, with a gradual deceleration in the second half of the year. It is projected to decelerate further throughout the forecast horizon, alleviating underlying inflationary pressures. Importantly, growth in real wages – which started towards the end of last year – is set to continue throughout the forecast horizon. By 2025, average real wages are set to fully recover their 2021 levels, though this is not the case for all Member States.
Continued wage and employment growth will sustain growth in disposable income in 2024. A further uptick in the saving rate to 14.4% however limits the expansion of private consumption to 1.3% – still well below trend growth. In 2025, real disposable income is set to accelerate further, while the decline in interest rates reduces incentives to save. This is set to deliver a more sustained consumption growth, at 1.7% in the EU.
Despite facing headwinds from persistent inflation and restrictive monetary policies, growth outside of the EU remained resilient throughout 2023.
However, it failed to spur demand for EU exports. Factors such as the post-pandemic rotation of consumer demand from goods to services, inventory depletion in advanced economies, and tightened monetary conditions impacting trade-intensive capital goods together contributed to a significant downturn in global merchandise trade. In this lacklustre trade environment, the EU as a whole managed to gain export market shares, though some Member States continued to register important losses. Looking forward, global growth (excluding the EU) is set to remain at close to 3.5% over the forecast horizon. For the world as a whole, growth is projected to edge up from 3.1% in 2023 to 3.2% in 2024 and 3.3% in 2025. This is a marginally upward revision compared to the Winter Forecast. The growth outlook for the US looks better than previously expected, mainly on account of the strong end-of-2023 performance. The persistence of inflationary pressures, nevertheless, suggests that the drag of tight monetary conditions is set to continue in the short term.
Notwithstanding structural impediments (see Special Issue 4.2. China’s impressive rise and its structural slowdown ahead: implications for the global economy and the EU), a strong rebound in China’s economic activity in the first quarter lifts its near-term outlook. Merchandise trade is set to rebound, as trade elasticity converges towards the “new normal” of around 1, below historical average. The improved outlook for global merchandise trade should support EU’s external demand for goods, in turn helping to lift the prospects of the weakened manufacturing sector. EU exports of goods and services are expected to expand by 1.4% this year and to attain 3.1% in 2025, amidst some losses in market shares. Imports are also set to rebound, implying a neutral or only marginally positive contribution to EU growth of net external demand in the two forecast years. With favourable movements in terms of trade, the current account balance of the EU is expected to rise back to 3.1% of GDP in both years, in line with pre-pandemic average, though with a larger contribution of export of services.
HICP inflation in the euro area is set to decrease from 5.4% in 2023 to 2.5% in 2024, while in the EU it is expected to decrease from 6.4% to 2.7%. Already by the end of last year, the disinflationary impulse of energy prices had largely died out. As recent increases in energy commodity prices – especially crude oil – are transmitted to consumers, energy inflation is set to turn positive again, but only marginally.
Food and non-energy industrial goods have now become the primary disinflation drivers and are expected to continue detracting from inflation over the forecast horizon, reflecting receding pipeline pressures. Service prices, in contrast, have so far contributed very little to the disinflation process, reflecting still elevated wage pressures. However, relatively weak economic momentum and decelerating wage growth should allow services inflation to ease over the forecast horizon. All in all, core inflation (excluding energy and food) is expected to decline over the forecast horizon at broadly the same pace as headline inflation, remaining just slightly above. After narrowing significantly since mid-2023, dispersion of inflation within the EU is set to decline further by 2025, reflecting country-specific drivers of core inflation, including the expected wage growth, developments in productivity and unit profits. These dynamics are largely mirrored by the GDP deflator – a measure of the evolution of domestic price pressures. The deflator is set to slowdown from 6% in 2023 to 3.3% in 2024 and 2.2% in 2025, as still high but abating wage growth is offset by a return to productivity growth and a reduction in profit margins.
After a sizeable reduction in 2022, the EU government deficit in 2023 increased marginally from 3.4% to 3.5% of GDP, as the deterioration economic conditions and increased interest expenditure outweighed the reduced cost of discretionary policy. The EU government deficit is nevertheless projected to resume declining in 2024 (to 3.0%) and 2025 (to 2.9%), driven by the almost complete phase-out of energy-related measures, lower subsidies on private investment as well as the gradual improvement in economic activity.
As in 2023, eleven Member States are projected to record a general government deficit exceeding 3% of GDP in 2024, dropping to nine in 2025. The EU fiscal stance turned neutral in 2023, after significant expansion in the 2020-22 period. It is set to be contractionary in 2024 and to turn broadly neutral in 2025.
This forecast incorporates all budgetary policies that have been adopted or credibly announced and sufficiently detailed (see Box 1.2.3). Amid higher costs of servicing debt and lower nominal GDP growth, the debt-to-GDP ratio is set to stabilise this year, at 82.9% in the EU before edging up by around 0.4pps. in 2025. By the end of 2025, in most Member States the debt-to-GDP ratios are projected to be lower than in 2020 but to remain above 60% of GDP in 12 countries.
Risks originating from outside the EU have increased in recent months amid two ongoing wars in our neighbourhood and mounting geopolitical tensions. Global trade and energy markets appear particularly vulnerable. Moreover, persistence of inflation in the US may further delay rate cuts in the US, but also beyond, resulting in somewhat tighter global financial conditions. On the domestic front, EU Central Banks may also postpone rate cuts until the decline in services inflation firms. In addition, the need to reduce budget deficits and put debt ratios back on a declining path may require some Member States to pursue a more restrictive fiscal stance than currently projected for 2025, weighing on economic growth. At the same time, a decline in saving propensity could spur consumption growth, while residential construction investment could recover faster. Risks associated to climate change and the degradation of natural capital increasingly weigh on the outlook. The EU is particularly affected, as Europe is the continent experiencing the fastest increase in temperature.
 
 
You can read the full report here.
 
 
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Blog post by Óscar Arce and David Sondermann |  Over the first two decades of the currency union, labour productivity (output per worker) in the euro area has been weak, at least when compared to other advanced economies. While productivity grew annually on average by 0.6 percent from 1999 to 2019, the average pace was more than twice as fast in the United States. Productivity somewhat recovered after the pandemic, but more recently the picture changed for the worse again: In 2023, productivity in the eurozone fell by almost 1 percent while it grew by 0.5 percent in the US. We discuss the drivers of recent weak productivity growth, how it might develop and what that all means for disinflation in the euro area.

Labour productivity moves with the cycle
Some structural factors can change productivity growth. In recent times, the unexpectedly quick adoption of digital technologies during the pandemic may have pushed up productivity growth. By contrast, some external shocks, such as the severe disruption in energy markets that followed the Russian invasion of Ukraine could have weighed on it.
While it is too early to ascertain the impact of these structural factors on productivity, the recent weak economic activity is likely to have dragged it down. Indeed, productivity in the euro area typically moves quite strongly with the business cycle. During times of slow or negative economic growth, labour productivity tends to be muted as well, and it rises as the economy recovers (Chart 1).

Chart 1
Cyclicality of labour productivity
Percentage deviations from trend

Source: Eurostat, CEPR and ECB staff calculations. Notes: The cyclical component is identified with the approximate bandpass filter of Christiano and Fitzgerald (2003), identifying the business cycles between 6 and 32 quarters, and is expressed in percent deviations from trend. Peaks and troughs are taken from the CEPR chronology of euro area business cycles.

 
This cyclical pattern of labour productivity results from the strategy of many firms to hold on to workers even at times of dire prospects. As it can be very costly to let workers go and then rehire and retrain them when things brighten up again, hoarding labour in bad times is a rather common practice among firms. To some extent, this obeys to various European-specific labour market institutions and social preferences that give particular prominence to employment protection compared to flexibility. These preferences were also mirrored in the government-sponsored job retention schemes, as seen massively during the pandemic, which may also exacerbate the cyclical ups and downs in productivity. Recent research by ECB staff, in fact, reveals that the share of firms hoarding labour was significantly elevated during the pandemic and post-pandemic period.[1]
Moreover, in the last quarters, a number of factors may have even amplified the cyclical decline of labour productivity, reinforcing an unusual combination of a thriving job market and weak economic activity (Chart 2).

Chart 2
Employment and real GDP
(2022Q1=100)
Source: Eurostat and ECB staff calculations.

What amplifies the ups and downs of productivity?
First, the increase of profit margins in 2022/23 enabled firms to hold on to their employees despite falling revenues for longer than usual. In other words, high profit margins created financial space for firms to hoard labour. Recent ECB analysis based on a sample 2014-2023 suggests that an increase in a firm’s profit margin by 1 percentage point increases the likelihood of labour hoarding by 0.2 percentage points.[2]
Second, hiring workers became less costly in 2022/23, as real wages fell significantly. When inflation rates peaked in 2022, wage increases didn’t keep up with rising price levels. Only with a time lag nominal wage increased and inflation rates fell, so that real wages started to rise. While productivity growth has also been weak since the onset of the recent inflationary burst, real wages fell significantly more (Chart 3). The resulting gap between real wages and productivity pushed down real labour costs. Then, as the wage-productivity gap persisted, the incentives for firms to hire more workers rose. And this weighed on the average productivity per worker.[3]

Chart 3
Productivity real wage gap
(2019Q4 = 100)
Source: Eurostat and ECB calculations. Notes: wages are deflated with the private consumption deflator. A similar, albeit somewhat smaller gap emerges using the GDP deflator.

Third, the unusually strong labour force growth in the post-pandemic period helped firms to get new workers on board to address actual or expected labour shortages. Firms throughout all sectors of the economy reported increasing shortage of workers during last years (Chart 4). This has been a result of reviving demand after the pandemic but also of a more structural lack of labour supply, given the increasingly ageing population and skill gaps in many professions. At the same time, the labour force grew strongly after the pandemic (Chart 4). On the one hand, a large share of the previously inactive domestic population joined the labour force, for instance senior workers. On the other hand, the euro area labour supply benefited from strong immigration. Amid the possibility of facing acute labour shortages, firms hired much of the additional workers available, even though this happened during a time of overall subdued economic activity. As this sort of precautionary motive for hiring workers strengthened, firms likely accepted some productivity losses as a lesser disadvantage.

Chart 4
Labour force growth (LHS) and labour shortages (RHS)

(percentages)

Source: Eurostat, European Commission and ECB staff calculations. The labour shortages question is based on the survey question: “What main factors are currently limiting your production?”. Labour shortages are aggregated from manufacturing, construction, and service sector indices by using employment weights for each sector.

Fourth, lower average hours worked per person led companies to hire some additional workers to keep their labour input overall unchanged. An average person employed in the euro area worked five hours less per quarter at the end of 2023 compared to before the pandemic. This is equivalent to around 2 million full-time workers. A large part of this decline in hours has certainly been compensated at the firm-level, such as by improving processes, reducing some slack or maybe non-registered overtime. But it is plausible that firms had to step up hiring new workers to some extent to make up for the lower average hours worked. As this happened, comparing to before the pandemic, productivity per worker dropped by 0.8 percent, while productivity per hour increased by 0.6 percent over the same time.
A cyclical recovery in productivity will support disinflation
The factors described above have supported the buoyant job creation since the end of 2022. However, they are likely to provide weaker tailwinds going ahead, which in turn will support the increase in productivity. First, profit margins are already adjusting and are expected to further decline with firms absorbing the increase in nominal wages. This will reduce the firms’ financial space for hoarding employment. Second, as real wages continue to recover (Chart 3), the gap between productivity and real wage growth is closing. As a consequence, employment gets relatively more expensive, and this will be pushing down new vacancies. Third, labour shortages have come down recently, reducing the pressure to find more workers. Moreover, the labour force is likely to grow less strongly going forward, as the pool of still inactive population that could be activated has declined considerably. Fourth, while some full-time employees want to work fewer hours, this is to some extent offset by part time workers aiming to work more. In other words, the downward trend of average hours worked is likely to continue, but at a slower pace. Hence, the need for more jobs to compensate for fewer average hours worked might not continue to the same degree as it did in previous decades.
For all these reasons, labour productivity is likely to be pushed up, in addition to the usual cyclical push from the projected economic recovery. A moderate nominal wage growth path in combination with stronger productivity growth would then soften cost pressures of firms. Together with lower profit margins, this would further support the disinflation process in the euro area.
This process is implicit in the latest ECB staff macroeconomic projections. But the recovery of productivity growth should not be interpreted as an unconditional prediction; not the least because some forces unchained by the large shocks of the last four years may still alter its course in ways that are not identifiable yet.
 
The views expressed in each article are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.

See Botelho, V. “Higher profit margins helped firms keeping labour hoarding elevated”, Economic Bulletin issue 4/2024 forthcoming.
See Botelho, V. “Higher profit margins helped firms keeping labour hoarding elevated”, Economic Bulletin issue 4/2024 forthcoming.
See Consolo, A, Foroni, C., “Drivers of employment growth in the euro area after the pandemic: a model-based perspective”, Economic Bulletin issue 4/2024 forthcoming.

 
 
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