Economic outlook for the Euro area in 2011 and 2012

Abstract

• In most advanced economies, strained public finances compel central banks to keep their expansive course, while interest rates in most emerging markets continue to be relatively low, if compared to their high potential growth rates. Thus, expansive monetary policies throughout the world, while giving cause for concern regarding long run macroeconomic stability, brighten the growth prospects for 2011. • Developments in the group of countries that are neither booming nor in stagnation will be pivotal for the euro area economy in 2011. Economic sentiment indicators appear to suggest that important core countries are benefiting more and more from the upswing in Germany. In addition, the crisis of confidence in 2010 has weakened the common currency and thus improved the competitiveness of firms producing in the euro area. • We expect euro area GDP to grow by around 1.7% in 2011 and 1.6% in 2012, not enough to bring the unemployment rate back below 10%. In addition, this forecast is made under the assumption that the fiscal crisis will not drastically damage financial conditions and economic confidence of firms and households. This serious downward risk is indicated by present sovereign risk spreads that price in a high probability for some form of debt restructuring that would implicate sizable losses for private creditors. In such a case, the stability of the European banking sector would be at stake, as it is a major creditor of the sovereign debtors that face a crisis of confidence. • Due to the higher external demand, industrial production remained quite strong in the second semester and forecasts have been revised upwards. We expect industrial production to grow a 7.1% during this year and close to 3.0% in both 2011 and 2012. • Inflation expectations have risen slightly since the last report, pushed by energy and goods prices. We forecast a 2.0% average inflation rate in 2011 that will drop to 1.7% in 2012.