Economic outlook for the Euro area in 2008 and 2009

Abstract

· The euro area economy is threatened by the present financial crisis and the downswing in the US, more than many emerging markets economies, due to the high degree of integration between European and US financial markets. · Up to now non-residential investment in the euro area has been supported by a high level of capacity utilization, still well filled order books and, on average, quite high profitability of corporate firms in the manufacturing sector. However, the turmoil in financial markets makes external financing of investment more expensive this year, as risk premia on bond markets have risen significantly, banks try to strengthen their balance sheets, and equity finance is not attractive in times of bear markets. · Demand from private households expands only modestly in 2008, because real incomes will be more or less stagnant, as will – at best – be household wealth, given the financial turmoil and slowing housing markets. In 2009, when the dampening effects from the downturn in the US and from financial markets fade, growth in the euro area will accelerate to rates close to potential. · Overall, our forecasts for GDP growth are 1.4% for 2008 and 1.7% for 2009. Average annual inflation is expected to reach 3.1% this year, and a moderation to rates close to 2% is not expected until the second half of 2009.