Euro-zone economic outlook

Output in the Euro-zone is expected to decline in Q2 (-0.2 %) and Q3 (-0.1%) and to recover slowly in Q4 (0.1%). Global demand is projected to improve moderately and net exports to be the main driving force of the mild recovery over the forecast horizon. However, unfavorable labor market conditions and impacts of fiscal consolidation will continue to dampen household disposable income.

Sluggish consumer confidence, is expected to lead to a decrease in private consumption in Q2 and Q3 (-0.2 %, -0.1% respectively) and stagnation in Q4. In Q2, credit conditions will continue to be tight in some countries. Credit supply is projected to remain limited as bank lending is affected by the need for banks to raise capital and the subdued economic outlook.

Therefore, investment is expected to fall in 2012 (-0.7% in Q2, -0.5% in Q3, -0.3% in Q4). Under the assumption that oil prices stabilize at USD 98 per barrel of Brent in Q3 and Q4 and that the euro/dollar exchange rate fluctuates around 1.25, inflation is projected to fall from 2.4% in Q2 to 2.0% in the second half of 2012.

This reflects diminishing pressures from global commodity prices and weak internal demand. The risk outlook is balanced as weaker global demand may add to financial market pressures, but market confidence could be supported by the evolution of the European framework to manage sovereign and financial risks.