Euro-zone economic outlook

In Q3 2014, economic activity is expected to increase, but only moderately, as geopolitical concerns are still strong and seem to affect investors’ confidence. GDP is projected to increase by 0.2% in the third and fourth quarter, and expand by 0.3% in Q1 2015.

This masks increasing asymmetries across euro area economies. The recovery is expected to be mainly driven by a gradual improvement in domestic demand conditions. Private investment is expected to restart over the forecast horizon triggered by improved liquidity conditions and lower cost of capital, after the sharp adjustment following the financial crisis. The rise in production activity and increasing demand for new production capacity will be the main factor underpinning the recovery. Consumption prospects remain positive, albeit subdued, as the recovery in the labor market is projected to be gradual.

Under the assumptions that the oil price stabilises at USD 97 per barrel and that the dollar/euro exchange rate fluctuates around 1.28, the headline inflation is expected to increase only marginally over the next two quarters, remaining significantly below the threshold of 2%. Key downside risks to this scenario comprise the effective recovery of investment and the increases in the savings rate of private households owing to deleveraging. A weaker external demand from emerging economies, especially from Asia and Latin America, as well as a greater impact of international tensions in Eastern Europe and the Middle East, might also be a drag on the exports and investment.