Economic outlook for the Euro area in 2012 and 2013

Abstract

- In the Autumn of 2012, economic growth in the world is rather anemic, and it will probably stay very moderate in the rest of this year and in 2013. Production in most emerging markets countries will pick up during winter, but not by much, while restrictive or less expansive fiscal policies will dampen demand in most advanced economies and in particular in Europe. - In the euro area, we expect GDP to shrink by around -0.2% in 2012 and grow by about 0.7% in 2013, mostly driven by higher exports and a limited rebound in consumption. Our industrial production forecast has been revised downwards with respect to the Summer report, now we expect a growth rate of -1.9% in 2012 and 1.4% in 2013. - The fall in the number of employed persons came to a halt in the second quarter, since the contraction of employment slowed markedly in southern Europe. The number of hours worked, however, continued to shrink. Downward pressure on wages lowered the growth rate (year on year) of hourly labor costs by half a percentage point to about 2% in the second quarter. However, the unemployment rate is expected to remain above 11%. - The latest move by the ECB has a good chance of preventing a further deterioration of financial conditions in the southern countries. Private households and firms in the north will further benefit from low external financing costs that are on a downward trend since early this year. - Additional pressures on the supply side in the international energy market are the main drivers of the important upwards revision of our total inflation forecast, which is now 2.6% for 2012. However, medium term inflation expectations continue to be in line with the ECB’s mandate, and our forecast for 2013 is 1.9%. In the current context, with neither confidence, economic activity and credit flows improving, this increase in forecast inflation is not expected to change the ECB’s expansionary monetary policy stance.