Economic outlook for the Euro area in 2007 and 2008

Abstract

• In early summer, the world economy continues to expand at a swift pace. Due to sluggish expansion of US demand and less benign monetary conditions, however, world production will temporarily lose momentum. But healthy growth of profits and private income in the US indicate that the chances for a recovery in the States later this year and a continuation of the worldwide upswing are good. • The upswing in the euro area continues as well. Investment activity was particularly dynamic during spring, but will slow down a bit in the coming quarters, partly due to rising interest rates. Private consumption will, to a large extend, fill the gap, supported by accelerating wage income growth. GDP growth is expected at 2.6% this year and 2.2% in 2008. • A main risk for this forecast is that overheating labour markets could lead to wage- and price dynamics that induce the ECB to tighten monetary policy more drastically than forecast here. This risk relates to the uncertainty of whether the recent acceleration of productivity growth is a mere cyclical phenomenon or whether potential output growth in the euro area has, due to increased competition and labour market reforms, increased. • Inflation is expected to be at 1.9% in 2007 and to reach 2.0% in 2008, at the border of the ECB target.