As forecast in the previous EZEO, GDP in the Euro-zone contracted by 0.2% in Q2. It is expected to continue declining in Q3 (-0.2%) and Q4 (-0.1%) as ongoing fiscal consolidation and the still high level of uncertainty will be taking their toll on domestic demand.
In Q1 2013 GDP will stagnate on the back of a moderate acceleration in external demand. The recent decisions to increase the firepower of the ECB and to allow the ratification of the ESM in Germany have likely reduced market perception of Euro-zone related risks and could lead to a stabilization of market confidence in the coming months.
Private consumption will continue contracting over the forecast horizon owing to purchasing power being depressed by the upsurge in inflation, by fiscal austerity measures and by unfavourable labour market conditions in most countries. Low capacity utilization, uncertain demand prospects and still tight credit conditions in some countries will protract the decline in investment over the forecast horizon.
Under the assumption that the oil price stabilizes at USD 114 per barrel and that the euro/dollar exchange rate fluctuates around 1.30, inflation is expected to decrease slightly from 2.7% in September 2012 to 2.3% in December 2012 and 2.0% in March 2013. Risks remain tilted to the downside as “fiscal cliff” in the United States, sluggish global trade and continued turbulence in the Euro area may dent sentiment, but the action of the European authorities could restore confidence quickly.