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Eurozone - Growth outlook deteriorates

10 October 2011

During the Summer of 2011, business and consumer confidence deteriorated sharply in the Euro area owing to mounting tensions on financial markets and fiscal consolidation in most European Union (EU) member states, according to the latest 'Eurozone Economic Outlook' published jointly by three economic institutes (ifo of Germany, Insee of France and Istat of Italy).

The positive impulse from external demand is also expected to be limited over the forecast horizon due to tight fiscal and monetary policies in most emerging markets and the stalling recovery of the US economy. Yet, industrial production rebounded in July, but partly because of the exceptionally late start of the Summer holidays in Germany. All in all, industrial production is seen to expand by +0.4 % in Q3 2011. Looking ahead, given the deterioration in business confidence and new orders outlook, the output is expected to stagnate in Q4 2011 and Q1 2012.

GDP losing momentum

In line with the projected slowdown in industrial production, GDP growth is forecast to stabilise in Q3 and to remain flat in Q4 and in the first quarter of 2012. This reflects both subdued world trade growth and weak domestic demand as expected from worsening business and consumer confidence.

Labour market conditions continue to be unfavourable and the rate of growth of nominal wages is expected to remain limited. Besides, fiscal consolidation in some member states is expected to weigh on household income.

Consequently, despite the deceleration in headline inflation projected over the next quarters, real disposable income would grow only modestly. Therefore, as indicated by the worsening of consumer expectations, private consumption growth is expected to be subdued over the forecast horizon.

After a decline in Q2, private consumption would slightly rebound in Q3 and almost stagnate in Q4 and Q1 2012.

Both equipment and construction investment are expected to suffer from increased uncertainty about the economic outlook.

Accordingly, investors are likely to postpone previously planned investment projects. The recent turmoil in the European sovereign bond market should entail a tightening in credit standards. A more restrictive credit supply would further weigh on private investment.

Overall, after a strong rebound in the first quarter of 2011 and a correction in Q2 in the housing sector, total investment would expand modestly over the forecast horizon.

Inflation declining in the next quarters

In September, consumer prices rose by +3% year-on-year, up from +2.5% in August. However, this increase mainly reflects the impact of seasonal factors on non-energy industrial goods inflation. Over the next quarters, inflation gyration will continue to stem mainly from the energy component.

Looking ahead, inflation is expected to slow down moderately at the end of the year with a faster deceleration in the first quarter of 2012. This reflects the assumption that the Brent oil price hovers around US$ 110 per barrel over the forecast horizon and the US$/Euro exchange rate stabilises at 1.37.

Annual HICP inflation is forecast to decrease to 2.4% in December and hit 1.8% in March 2012, reflecting, among other factors, the baseline effect of last year's oil price increases. In the absence of second round effects, non-energy price pressures are expected to remain subdued. Consequently, core inflation is forecasted to remain quite stable, fluctuating between 1.3% and 1.5% in the next two quarters.

The pass-through of higher commodity prices will continue to be dampened by a negative growth outlook and persistent labour market weakness.

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