Economic outlook for the Euro area in 2009 and 2010

The European Forecasting Network (EFN) is a research group of European institutions, founded in 2001 under the auspices of the European Commission.· The world wide recovery will put an end to the recession in the euro area in the second half of 2009, but chances for a robust upswing for the year 2010 are slim. We expect GDP to fall around 4.0% in 2009, but a positive growth rate of 0.8% in 2010. However, as unemployment will continue to rise and fiscal policy in member countries with high budget deficits will become restrictive, private consumption is expected to decrease by -0.5% in 2010. Public consumption, public investment and exports will support aggregate demand. · Industrial production has bottomed out in the second quarter of 2009. Nevertheless, industrial recovery will take time and average growth rates are expected to be just slightly positive in 2010 (1.1%). It is worth mentioning that this figure has improved significantly since our last report, as world trade has started to recover and some firms are restocking their inventories or reducing them at a slower rate than in the first half of the year. However, private investment will be declining well into next year, as capacity utilization is extremely low and the real costs of financing are not as attractive as interest rate figures appear to suggest. · The HICP evolution is expected to remain stable during 2009 and most of 2010. In fact, inflation expectations confirm that price stability is one of the virtues of the euro area and that inflation fears should not limit, for the moment, fiscal and monetary counter-cyclical policies. · The main risk for the world economy is that policy fails to adapt to a new postcrisis environment. One challenge is the correct timing for reducing the extremely expansive policy stance and public support for the financial sector; another is regulatory reform of the financial sector that has the potential to stabilize or destabilize confidence of households and firms