Euro-zone economic outlook

Euro-zone GDP growth softened in Q4 2010 (to +0.3%, after +0.4% in Q3), due to a weather-related postponement of construction investment, notably in Germany and in France, and to a slowdown in global activity, which dampened the area export growth.

Consumption rebounded at a rate of 0.4%, in part attributable to a strong growth in French automobile consumption, driven by the prospect of the scrappage bonus expiration on 31 December 2010. GDP in the euro-zone is expected to accelerate in Q1, moderating somewhat over the forecast horizon (+0.5% in Q1 2011, +0.4% in Q2 and Q3). Private consumption growth would flatten (around +0.2% per quarter), as the euro-zone labor market as a whole is likely to remain fragile, with uneven developments across member States.

Furthermore, both fiscal consolidation in many euro-zone countries and inflation would dampen households real income. Under the assumption that the oil price stabilizes at USD 113 per barrel of Brent and that the euro/dollar exchange rate fluctuates around 1.38 over the forecast horizon, inflation should stabilize at 2.6 % in June and in September 2011, from 2.2% in December 2010.

Investment is expected to rebound in Q1, owing to a sharp rise in the construction sector and to improved growth prospects. In Q2 and Q3, it should increase further but at a lower pace, because of a loss of momentum in foreign demand and financial market increased uncertainties at the beginning of 2011: new tensions have emerged surrounding the sovereign debt of some euro zone states, particularly Ireland, Greece, and Portugal; the political tensions in the Middle East and North Africa are raising fears of a lasting rise in oil prices, and of a resulting tightening of monetary policy in order to curb inflation; lastly, the earthquake in Japan might cause prolonged supply-chain disruptions in some key economic sectors.