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Euro-zone economic outlook
January 7, 2011
Association of Two Leading European Economic Institutes
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.
Industrial production is flattening
and fiscal consolidation somewhat weakens
private demand.
Industrial production lost momentum in Q3
2010 – it expanded by merely 0.8% after
increasing by 2.3% in both Q1 and Q2. This
deceleration mainly reflects a slowdown in
external demand, in a context of less buoyant
activity in China and the emerging Asian
economies where policies tightened. Moreover,
the inventory surge that contributed strongly to
the upturn is coming to a gradual end.
q-o-q
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
-8.0%
Growth in industrial production is foreseen to
further moderate in the coming quarters. While
the latest readings of most business surveys
are showing signs of improvement (especially in
Germany and France), external demand is likely
to decelerate, in line with the ongoing
weakening of growth in Japan as well as in
emerging Asia and Latin America. Moreover, the
expected tightening of fiscal policy in most
member states should weigh on purchasing
power and domestic demand in the euro area.
Euro-zone Industrial Production Index
sa - wda
y-o-y
8.0%
4.0%
0.0%
-4.0%
-8.0%
Forecasts
q-o-q
04
05
06
y-o-y
07
-12.0%
-16.0%
08
09
10
11
-20.0%
Source: Eurostat and Ifo-INSEE forecasts
Euro-zone GDP growth
sa - wda
q-o-q
1.5%
y-o-y
1.0%
2.0%
0.5%
0.0%
0.0%
-0.5%
-2.0%
-1.0%
-1.5%
All in all, industrial production is forecasted to
increase by 0.6% in Q4 2010 and by 0.3% and
0.4% in Q1 and Q2 2011, respectively.
Forecasts
-2.0%
q-o-q
-2.5%
-3.0%
4.0%
04
05
06
-6.0%
y-o-y
07
-4.0%
08
09
10
11
-8.0%
Source: Eurostat and Ifo-INSEE forecasts
GDP recovery slowing down
Due to a strong expansion of GDP in H1 2010,
employment stopped declining in the eurozone. In Germany, a robust job growth and
accelerating wages should support households’
income. However, in the euro-zone as a whole,
the unemployment rate hovers around 10%
with no improvement in sight. Persistent slack
in labour markets should thus continue to weigh
on nominal wages over the forecast horizon. A
more restrictive fiscal policy stance is also
expected
to
dampen
the
recovery
in
households’ disposable income. Accordingly,
private consumption in the euro-zone is
expected to rise by 0.2% in Q4 2010 before
After rising by 1.0% in Q2 2010 real GDP in the
euro-zone expanded at a slower pace in Q3
(+0.3%), mainly due to a less favourable
external
environment.
There
was
again
substantial cross-country heterogeneity. While
GDP growth remained robust in Germany and,
to a lesser extent, in France, economic activity
remained subdued in Italy, almost stagnated in
Spain and even contracted in Ireland and
Greece.
In H1 2011, the pace of growth would moderate
slightly, as world trade continues to slow down
www.ifo.de, www.insee.fr
1
Euro-zone economic outlook
January 7, 2011
Association of Two Leading European Economic Institutes
moderating in the coming quarters (+0.1% in
both Q1 and Q2 2011).
forecast horizon, euro-zone inflation should
slow down to 1.7% in both Q1 and Q2 2011.
As
a
consequence
of
ongoing
fiscal
consolidation, public investment in the euro
zone will barely increase and even contract in
some member states. Private investment should
increase only modestly over the forecast
horizon – it should benefit from low ECB policy
rates, a slow but gradual improvement in
business profitability, as well as continued
deleveraging in the banking sector. However,
the discontinuation of favorable depreciation
rules that took place at the end of 2010 in
Germany will most likely alter the path of the
ongoing investment recovery. It should have
stimulated German investment in the fourth
quarter of last year while slowing it down in the
current quarter. Total investment in the eurozone is therefore expected to rise by 0.4% in
Q4 2010, followed by +0.2% in Q1 and +0.3%
in Q2 2011. Recent tensions in European
sovereign-bond markets are likely to have a
limited
impact
on
euro-zone
growth.
Nevertheless, they could increase uncertainty
and precautionary behavior.
Core inflation should stay at its current level of
1.0% in Q1 2011 and slightly increase in Q2
2011 (+1.1%) as the recent rise in commodity
prices diffuse to core inflation. Yet, this effect
would be dampened by the high level of
unemployment, which weighs on wages, and
the persistence of excessive production
capacities, which weighs on margins.
2010/2011 Forecasts, % changes, sa - wda
q-o-q
Q3-2010
y-o-y
IPI
0.8
GDP
0.3
Consumption
0.1
Investment
-0.3
Inflation*
6.9
1.9
1.0
0.2
1.8
Q4 - 2010
forecasts
0.6
0.3
6.2
0.4
2.1
0.1
0.9
0.4
4.0
0.3
2.1
0.2
Q1 - 2011
forecasts
0.6
0.2
1.8
2.2
2.3
2010
forecasts
Q2- 2011
forecasts
0.4
1.7
1.4
0.1
0.7
0.5
0.3
1.7
6.7
2.1
0.3
-1.0
0.6
1.7
1.7
Source: Eurostat and Ifo-INSEE forecasts; * end-of-quarter
Euro-zone Inflation (HICP)
y-o-y
4.0%
Forecasts
3.0%
All in all, the pace of recovery in the euro-zone
is expected to remain relatively modest over
the forecast horizon. GDP is expected to have
grown by 0.4% in Q4 and should increase by
0.3% in both Q1 and Q2 2011. Annual GDP
growth in 2010 would be 1.7%.
2.0%
1.0%
Total inflation
Core inflation
0.0%
Inflation: A slight deceleration
-1.0%
In Q4 end-of-quarter, inflation (HICP) in the
euro-zone increased by 2.2% due to a raise in
food and energy prices. Under the assumption
of a Brent price around $90 and a euro/dollar
exchange rate fluctuating around 1.34 over the
04
05
06
07
08
09
10
11
Source: Eurostat and Ifo-INSEE forecasts
Methodological note
This quarterly publication is prepared jointly by the German Ifo institute and the French INSEE institute. The forecasts are produced
with the help of tools shared by the two institutes, using time-series models based on business surveys by national institutes,
Eurostat, and the European Commission.
Our joint two-quarter-ahead forecast covers euro-zone industrial production, GDP, consumption, investment, and inflation.
Publication is timed to coincide with Eurostat’s second release of quarterly national accounts.
Fuller economic analysis for each country (Germany, France) is available in:
- Ifo Konjunkturprognose, Ifo
Nikolay Hristov
- Conjoncture in France, INSEE
Contacts:
Laure Turner
Next release:
Next forecast horizon:
2011 Q3
www.ifo.de, www.insee.fr
+49 (0) 89 92 24 1225
+33 (0) 1 41 17 59 63
April 6, 2011 (date of Eurostat’s second release of quarterly national accounts)
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