Economic outlook for the Euro area in 2008 and 2009

Abstract

· The short term outlook for activity in the euro area is clouded, as industrial production has been falling during summer, and confidence is still on a declining trend. Production will be little more than stagnating for the rest of the year, not least because financing costs will not fall or even rise further, as risk premia for credit, bonds and equity will reach higher levels. · The average yearly growth rate of the industrial production index will be close to zero in both 2008 and 2009. By component, there is a widespread decline in expectations in all sectors except energy. Especially striking is the fall in the growth rates of Capital, Durable and Intermediate Goods. · GDP growth is expected to be 1.2% in 2008 and 1% in 2009, well below potential. Growth in private consumption will be particularly limited, at 0.4% in 2008 and 1.1% in 2009. · More pessimistic growth expectations have, however, led to price movements that start to remove the negative shocks by which the downturn was partly triggered in the first place: the euro has depreciated relative to the dollar since end of June, and oil prices have receded markedly. · Thanks to the pessimistic growth expectations and the decrease in oil prices, inflation expectations have somewhat improved in the last two months. We expect inflation to continue to fall to 2.9% by the end of this year, registering values close to 2% from April 2009 on. · Concerning the possibility of a serious crisis in euro area housing markets, there is some reason for cautious optimism: housing finance is on a more solid basis than in the US, and indebtedness of private households is much lower than either in the US or in Britain.