Economic Analysis

¹) Output and demand indicators provide information on the cyclical position of the economy, an important element in the ECB’s analysis of prospects for price developments. National accounts, short-term statistics on activity in industry and services, orders, and qualitative survey data provide information about output.

²) In terms of price and cost developments, alongside the Harmonised Index of Consumer Prices (HICP) link to Construction and Features of the HICP and its components, price developments in the industrial sector, as measured by producer prices, may play an important role in signaling future changes in consumer prices as changes in production costs normally feed through to consumer prices. Labor costs, which are an important element of overall production costs, have a significant impact on price formation via unit labor costs.

³) Labor market data (on employment, unemployment, vacancies and labor market participation) are of crucial importance in the monitoring of conjunctural developments and in assessing structural changes in the functioning of the euro area the exchange rate may also alter the price competitiveness of domestically produced goods on international markets, thereby influencing demand conditions and potentially the outlook for prices. If such exchange rate effects alter the expectationseconomy.

⁴) Exchange rate movements have a direct effect on price developments through their impact on import prices. Changes in and behavior of wage- and price-setters, the potential for second-round effects stemming from the exchange rate may exist.

⁵) Balance of payments statistics provide important information on developments in exports and imports which may affect inflationary pressures via their impact on demand conditions. These data allow export and import prices to be closely monitored and contribute to the assessment of the potential impact on import prices of movements in the exchange rate and changes in commodity prices (such as oil prices).

⁶) Financial market indicators and asset prices may exert a strong influence on price developments. Asset prices and financial yields can also be analyzed to derive information about the expectations of the financial markets, including expected future price developments. Moreover, the monitoring of asset prices might help identify shocks that hit the economy.

⁷) The government sector represents a substantial part of economic activity; information on both financial and nonfinancial public sector accounts is essential.

⁸) The balance sheet statistics of the monetary financial institutions (MFIs) provide information that can be used to derive euro area monetary aggregates and their counterparts. Furthermore, data on financial accounts present financial transactions and balance sheets for all economic sectors, such as households and financial and nonfinancial corporations. These statistics show the different sectors’ financial investment and financing activities, the development of wealth and debt, and the financial interrelationships between the sectors.

⁹) The word "projection" is used to underline that the published projections are the result of a scenario based on a set of underlying technical assumptions (including the assumption of unchanged short-term interest rates). This is the way projections are produced in many central banks in order to best inform monetary policy decision makers about what could happen if policy rates remained unchanged. Thus, it should be clear that the projection will not, in general, be the best predictor of future outcomes, in particular at somewhat longer horizons. In fact, it represents a scenario that is unlikely to materialize in practice, since monetary policy will always act to address any threats to price stability.

¹⁰) Several different macroeconometric models are available for the euro area as well as for individual member countries. In a situation of model uncertainty, it is preferable to employ a variety of models, embodying various views of economic structure and estimated using different methodologies, rather than relying on a single and all-encompassing framework. The projections produced by these models are adjusted in light of the technical expertise of staff both at the ECB and at the NCBs.