Economic outlook for the Euro area in 2008 and 2009

Abstract

• Recent data point to much more muted growth dynamics in 2008 than in the past year. One cause is the prolonged oil price hike during 2007. The second and more important cause is the intensification of tensions on world financial markets. Due to problems in the financial sector, credit expansion will slow next year in the euro area as well as in the US. This will dampen demand in the real economy. • Consumer prices have recently risen significantly, and wages, on average, continue to grow only very moderately. This means that real wages will not be substantially higher next year than in 2007, and the expansion of private household consumption will continue to be sluggish. • Because of healthy employment growth, high profits, and strong demand for euro area products from oil exporting countries, activity will, after a significant slow down during winter, accelerate. At the beginning of 2009, production is forecasted to expand at a rate of about 2 %. • Due to recent developments in oil and food prices (and second-round effects), the risk of average annual inflation in 2008 exceeding 2% is very high.