Economic outlook for the Euro area in 2011 and 2012

Abstract

· High growth dynamics and demand coming from emerging markets will slow only modestly in the rest of 2011 and in 2012, but the intensification of the financial turmoil and the doubts about the ability of the European Union to contain the consequences of possible defaults will hamper world economic growth considerably in our forecasting horizon. · For the euro area, we expect GDP to grow by around 1.6% in 2011 and 0.8% in 2012, not enough to bring the unemployment rate back below 10% and substantially less for 2012 than in our Summer report. Many private households and firms will adopt a wait-and-see attitude while, to restore confidence in the euro area sovereign debt, fiscal policy will become even more restrictive. · Our industrial production forecast has also been revised downwards with respect to the Summer report, now we expect a growth rate of 3.7% in 2011 and 1.6% in 2012, mostly due to the relative deterioration of the euro area external demand. · Because of energy prices and aggregate demand moderation, our inflation forecasts for 2011 and 2012 are reduced to 2.6% and 1.3% respectively. · Lower inflation and growth forecasts, combined with the intensification of the financial turmoil and the announced restrictive fiscal policy in many euro area countries, make us suggest that the next interest rate decision of the ECB should be a fast and substantial cut, notwithstanding the September value for HICP inflation.