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Euro-zone Economic Outlook January 2009

Ongoing recession

The Eurozone plummeted into recession in H2 2008. Short-run indicators point to a worsening outlook in the final part of the year. The trend should still be negative in H1 2009, hopefully at a more moderate pace if supportive policies adopted in the area start to have some effect.

Industrial production, on a downward path since several months, should drop in Q4 (-2.3%) and fall again in Q1 and Q2 2009 (-1.3% and -0.7%). Despite the positive influence of lower inflation, consumption should diminish for a couple of quarters (-0.2% in Q4 2008 and -0.1% in Q1 2009) and stabilise in Q2 2009. Tighter credit and falling demand weigh on investment which could fall by -2.5% in Q4 2008, and by -1.6% and -1.2% in Q1 and Q2 2009. Overall, GDP should contract at the forecast horizon (-0.6% in Q4 2008, -0.4% in Q1 2009 and -0.2% in Q2 2009). On the assumption that the Brent price will fluctuate in the range US$ 45-50 and the US$/euro exchange rate will hover around 1.40, inflation should significantly ease, moving to 1.2% in March and 0.6% in June 2009.

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