After a sharp slowdown in Q2, real GDP growth in the euro area is expected to remain subdued until Q1 2012. The loss in GDP momentum owes to a stronger than expected weakening in global demand and self-reinforcing negative impulses from the following: the deepening of the sovereign debt crisis, financial markets turbulence and a worsening of business and consumer confidence. This deterioration of the economic climate is weighing on domestic and external demand.
Investment is projected to grow slowly in the next quarters as a result of weak economic fundamentals and financial market tensions. Private consumption growth will also remain fragile over the forecast horizon, in a context of precautionary savings and lacklustre real disposible income. Under the assumption that oil price stabilizes at USD 110 per barrel (in Q4 and Q1 2012) and that the euro/dollar exchange rate fluctuates around 1.37, inflation is expected to decelerate sharply over the forecast horizon.