Economic outlook for the Euro area in 2013 and 2014

The European Forecasting Network (EFN) is a research group of European institutions, founded in 2001 under the auspices of the European Commission.- At present, economic growth is low in most regions of the world, but confidence indicators in countries such as China, Brazil and Russia have markedly risen in the final months of the year, suggesting that the world economy is likely to get some momentum from emerging markets in 2013. - The ECB succeeded in restoring confidence for the time being: risk spreads for Spanish and Italian bonds have come down markedly, and the capital flight out of the financial sector of the southern member states of the euro area has stopped. - The recession causes adjustment processes in the euro area: the participation rate is going up since falling real disposable incomes of private households and less attractive pension claims induce many people to look for jobs on already strained labour markets. Furthermore, external imbalances swiftly decline in the countries in crisis, and seasonally adjusted trade balances are now positive in Portugal, Italy, and Spain. A quick turnaround, however, is not in sight. - Unemployment rates will continue to increase for the whole year of 2013, and private wealth will probably continue to shrink in most member states, as property prices have to fall further. All in all, GDP is forecast to be 0.2 percent higher in 2013 than in 2012, from the previously forecasted growth of 0.7%. - The situation should slightly improve in 2014, with an expected GDP growth of about 1.1%. However, this will not be sufficient to lower the unemployment rate, which actually could further increase to about 12.6%. - Inflation expectations for 2013 have moderated to a y-o-y rate of 1.6% due to a reduction in expected energy inflation in the last months. Inflation should remain subdued also in 2014, at about 1.5%. Thus, the ECB can keep its expansive course for the foreseeable future, butwe expect no further interest rate cuts in the short to medium term