In accordance with our latest forecast, Euro-zone GDP declined by 0.3% in Q4. Both external and internal demand dropped. The European sovereign debt crisis affected the real economy via the increase of credit costs and private investment declined by 0.5%. Private consumption fell (-0.5%) as a result of weak consumer confidence and declining purchasing power. The slowdown of international trade, mostly within the Euro-zone, put a drag on exports. However, at the beginning of 2012, financial tensions have eased, thanks to the adoption of new fiscal consolidation measures in some member countries, to the strengthening of budgetary discipline in the euro area and to the interventions of the European Central Bank. As a result, business confidence has slightly rebounded since the beginning of the year.
The Euro-zone is expected to recover slowly (‑0.2% in Q1, 0.0% in Q2 and +0.1% in Q3). In fact, it would still face some headwinds. Fiscal consolidation and deteriorating labour market conditions will weigh on household consumption. The loosening of financial tensions would slowly ease credit standards but investment is likely to remain sluggish. Finally, oil prices have increased since the start of 2012, thanks to geopolitical troubles, and further increases cannot be excluded. Under the assumption that oil prices will be stable over the forecast horizon at around USD 125 per barrel for Brent) and that the dollar/euro exchange rate fluctuates around 1.33, inflation is expected to reach 2.2% in September 2012, down from 2.6% in March 2012. This scenario is subject to various risks: renewed financial turbulences, possible social tensions in some countries due to deteriorating labour market and fiscal reforms, growth prospects in emerging countries.