Euro area: Gradual recovery
The sharp contraction in euro area activity appears to have ended sooner than anticipated, with further improvements in financial conditions, fiscal stimulus measures and stabilisation of export demand. However, headwinds from financial sector deleveraging and rising unemployment suggest that the recovery will be gradual. Bank lending standards are tight, credit growth to households and firms is weak and property prices are declining in many countries. Despite the improved outlook, core inflation should continue to moderate until the end of 2010 due to substantial economic slack.
Low core inflation, tight credit conditions and a persistent negative output gap make it appropriate for the current expansionary monetary policy stance to be maintained until late 2010. Thereafter, emergency credit support measures should be withdrawn and policy rates gradually increased. Medium-term growth prospects would be enhanced by clear and credible plans for future fiscal consolidation and further structural measures to deepen the single market, enhance competitive pressures and strengthen financial supervision.
©OECD Observer 2010