Euro area: Outlook relatively good

The expansion has continued but at a slower pace than in 2006. Higher interest rates, a stronger euro and tighter credit conditions are all damping activity. But the outlook remains relatively good, with growth projected to return to its potential rate following some slight near-term weakening. Rising employment and a moderate upturn in wage growth will underpin household incomes and consumption. Inflation has veered up due to a sharp rise in energy and food prices, but is expected to decelerate to below 2%.
With risks to activity on the downside and inflation likely to slow, further increases in interest rates are not needed at this point. The recent improvement in the fiscal position is welcome, but governments need to maintain the momentum and aim for budget balance or better. Strengthening the internal market in the EU would improve Europe’s long-term growth prospects and make the monetary union run more smoothly. The fragmented system of financial supervision may need to be rethought.



©OECD Observer No. 264/265, December/January 2008

OECD Economic Outlook No. 82, December 2007
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