Economic outlook for the Euro area in 2008 and 2009

Abstract

· The world economy is bound to slow further this year, but severe recessions are not in sight. The most serious risks might stem from the political economy of emerging market countries: macroeconomic turbulences are certain to emerge if price signals from energy markets are further suppressed and inflation is not curbed by less expansive monetary policies. · Activity in the euro area was surprisingly resilient at the beginning of this year. The main engine of growth continues to be investment in fixed capital. However, demand from private households will continue to expand only very modestly, because real disposable income is, due to high inflation, stagnant this year. Moreover, employment growth slows, and unemployment has already ceased to fall. · The euro area economy will expand slowly for the remaining three quarters of 2008, and growth will not accelerate to rates close to potential before the end of 2009, when the dampening effects from the downturn in the US and turmoil in financial markets should fade. GDP growth is expected at 1.7% in 2008, and 1.3% in 2009. · Energy and food prices drive euro area inflation to its historical maximum: 3.7% in May. Year on year inflation is expected to further increase, reaching a peak of 3.9% in August 2008, and closing the year with an average rate of 3.5%. However, things should improve next year, with an average expected rate of 2.1%, due to more restrictive monetary policy and the slowdown of the economy combined with lower growth in raw material prices.