Quarterly Bulletin Q3 2013

Developments in the International
and Euro Area Economy
Quarterly Bulletin 03 / July 13
57
Economic Growth – Outlook
Euro area GDP may begin to pick up modestly
in the second half of the year, as improvements
in the net trade position outweigh weak
domestic demand. Euro area GDP is likely
to be supported by positive developments in
Germany, where the growth recorded in Q1 is
expected to be sustained throughout 2013.
Domestic demand is expected to continue
to exert a significant drag on euro area GDP
growth for the rest of 2013. Private investment
in particular will continue to contract across
the euro area as business expectations
and industrial confidence levels remain low.
Some improvement is anticipated in 2014
as export demand stimulates machinery
and equipment investment and sentiment
improves. Consumption is expected to remain
muted during 2013 as weak labour markets,
combined with low levels of confidence
and on-going balance sheet adjustment in
several countries, could serve to negatively
impact household spending capacity. These
factors are expected to wane only gradually,
maintaining a drag in some countries into
2014. This might be partly offset by increases
in real incomes arising from falling inflation.
Government consumption is expected to
be fairly flat over 2013, reflecting on-going
fiscal consolidation efforts across the euro
area, before picking up modestly in 2014.
Imports are expected to remain weak in
response to dampened domestic demand,
although some pick-up is likely in response to
increased activity in exports with high import
content. The net trade position is expected
to be the primary driver of any GDP growth
during 2013 and could serve to offset weak
domestic demand. Thereafter, while exports
are expected to gain momentum during 2014,
import demand is also expected to pick up
in response to improved domestic demand
conditions.
The OECD revised down their forecasts for
euro area GDP growth for 2013 and 2014 to
-0.6 and 1.1 per cent, respectively, with the
expectation that external demand will drive
GDP growth and the headwinds weighing on
domestic demand will abate only gradually
(Table 1). These forecasts are in line with the
June Eurosystem Broad Macroeconomic
Projections Exercise projections for euro area
GDP growth in both years. While adverse
risks attached to the forecasts have abated
somewhat over the past year, they are still
judged to be on the downside. Renewed
uncertainty within the euro area may
undermine the potential for consumption and
investment to regain some ground toward the
end of 2013 and into 2014. In addition, ongoing
balance sheet correction in the private
sector and persistently low levels of confidence
arising from high unemployment may continue
to weigh on any recovery.
Inflation – Recent Developments
Euro area annual HICP inflation has been
trending downwards since August 2012,
reaching a three year low of 1.2 per cent in
April. While recent lower inflation rates primarily
reflect a reduced contribution from energy
prices, the April figure was artificially low due
to a distortion related to the timing of Easter
this year relative to last. Inflation increased
to 1.4 per cent in May as these distortions
unwound. Core inflation, meanwhile, has
remained relatively steady for some time. Any
downward price pressures emanating from
increased economic slack have largely been
offset by increased contributions from both
administered prices and indirect taxes in the
two components that make up core inflation,
namely services and non-energy industrial
goods. Nevertheless, a slight downward
trend in the core rate is discernible, as HICP
excluding food and energy averaged 1.3
per cent in the six months up to May 2013,
down from an average of 1.5 per cent in the
preceding six-month period.
Since peaking in early 2011 at 6.6 per cent,
producer price inflation (excluding construction)
has generally been on a downward trajectory,
falling to -0.2 per cent in May 2013. PMI
survey measures of prices, meanwhile, indicate
weak price pressures in the manufacturing
sector. The manufacturing input price index