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Euro-zone Economic Outlook January 2011

A slow recovery

Euro-zone GDP growth softened in Q3 (0.3% after 1.0% in Q2), mainly due to the deceleration of world trade. Investment dropped by 0.3% while private consumption expanded modestly (+0.1%). Over the forecast horizon, the recovery of GDP in the euro-zone is expected to proceed at a similar pace (+0.4% in Q4, +0.3% in Q1 and Q2 2011).

Despite a slightly more buoyant labour market, especially in Germany, household consumption would be held back by weakening gains in purchasing power (+0.2% in Q4 2010 and +0.1% in both Q1 and Q2 2011). In particular, the expansion of disposable income would be affected by fiscal consolidation measures.

Investment should increase in H1 2011, but at a moderate pace, as external demand is flattening and credit conditions as well as capacity utilization improve just slowly. Under the assumption that the oil price stabilizes at USD 90 per barrel of Brent and that the euro/dollar exchange rate fluctuates around 1.34 over the forecast horizon, inflation should slow down from 2.2% in December 2010 to 1.7% in June 2011.

Contact

Dr. Atanas Hristov

Ifo Institute
Ifo Center for Business Cycle Analysis and Surveys
Phone: +49(0)89/9224-1228
Fax: +49(0)89/985369
Email: hristov.a @ ifo.de
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