ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Chart 28 Euro area consumers’ qualitativeinflation perceptions and expectations(percentage balance; seasonally adjusted)80706050403020100inflation expectationsinflation perceptionsJan. 2002: euro cashchangeover-101995 1997 1999 2001 2003 2005 2007-102009Source: European Commission Business and Consumer Surveys.Note: Data refer to the euro area including Slovakia.making. Information derived from professionalforecasters indicates that survey-based longterminflation expectations (five years ahead)remained anchored around 2.0%, although therewere, in the middle of the year, indications ofsome upward movements and increased risks.These were reversed later in the year, accordingto survey data from Consensus Economics,Euro Zone Barometer and the ECB Survey ofProfessional Forecasters. Break-even inflationrates derived from inflation-linked bonds andswaps in the euro area (using the implied oneyearforward break-even inflation rate four yearsahead) increased gradually to more than 2.5% bymid-2008, before receding in the autumn, fallingto around 1.8% by the year-end. However, thesemarket-based measures (in particular bondbasedmeasures) were distorted at the time bysudden movements in investors’ preferencesand portfolio shifts. All in all, by mid-2008 anumber of survey and market-based indicatorspointed to a clear risk of inflation expectationsbecoming unanchored, which required a clearbut balanced signal on the part of the ECB, andby the end of the year, inflation expectations hadfallen back to more satisfactory levels.807060504030201002.4 OUTPUT, DEMAND AND LABOUR MARKETDEVELOPMENTSSHARP SLOWDOWN IN ECONOMIC ACTIVITYReal GDP growth in the euro area slowed to 0.8%in 2008, following solid growth rates of 2.7%in 2007 and 3.0% in 2006 (see Table 3). Whilethe year started on a relatively resilient note,there was a rapid deterioration in activity fromthe middle of the year in the face of weakeningdomestic demand and a pronounced slowdown inthe world economy. The year ended with a sharpcontraction in activity amid renewed financialturmoil and a virtually unprecedented downturnin global activity and demand.Quarterly growth rates were affected by certaintechnical factors. The strong GDP growth rateof 0.7% in the first quarter partly reflected anunusually mild winter in many parts of Europe,which boosted construction and thus investment,and a positive contribution to growth frominventories at the start of the year. The unwindingof these factors contributed to the quarteron-quartercontraction in GDP of 0.2% in thesecond quarter of 2008. Notwithstanding thesetechnical factors, the first half of 2008 taken asa whole pointed to a continuation of the mildslowdown in activity observed in the course of2007, with quarterly GDP trend growth slowingdown from ½% to ¼%. Only half of the quarteron-quartergrowth in the first part of the yeararose from internal demand, amid particularlysubdued consumption and weakening residentialinvestment, while the other half resulted fromnet exports.However, external demand started to showsignificant signs of contraction in the summer,as renewed weaknesses emerged in the USeconomy and activity in emerging markets –which had previously been perceived tobe shielded from the effects of the globalslowdown – decelerated (see Chart 29).62 ECBAnnual Report2008