Economic outlook for the Euro area in 2007 and 2008

The European Forecasting Network (EFN) is a research group of European institutions, founded in 2001 under the auspices of the European Commission.• The turmoil on financial markets has distinctly clouded the outlook for worldwide growth; present risk spreads will probably not shrink by much over the forecasting horizon, and worldwide financial conditions will be less benign than those during the past few. • In the euro area, production will converge to its potential growth path in autumn, mainly because the investment upswing is coming to an end soon. Consumption will partly fill the gap, as confidence in job security has greatly increased. • A major downside risk for the euro area is that housing markets will weaken where they have been booming for years, particularly in Spain and in Ireland. The fear is that rising interest rates might trigger a downturn. In addition, a loss of confidence in mortgage related securities as a result of the events in the US could aggravate financial conditions for European housing markets. • In line with the forecasts coming from National Accounts, the updated forecasts for the Economic Sentiment Indicator point to a gradual fall of confidence in the economy’s evolution until the second quarter of 2008, subsequently tending to stabilise at levels still high and similar to those observed in mid-2006. • Inflation forecasts have been revised upwards from the last report, to 2.0% in 2007 and 2.2% in 2008. Practically all basic HICP components contribute to this upwards revision, except non energy industrial goods and services in 2008. It is worth mentioning the upwards revision in forecasts experienced by processed food prices in the last month