Financial conditions continue to improve
Financial conditions have improved overall under extensive policy support and due to growing confidence, despite successive rounds of market volatility regarding sovereign debt risks. Credit to the non-financial sector, notably households, is increasing and equity prices have risen. Despite the publication of the second EU-wide stress tests, the strength of the banking system and its ability to provide credit as demand picks ups remain concerns. Moreover, certain sovereign spreads have returned to the peaks of the fiscal crisis in May 2010, despite the EU support facilities now in place.
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Euro area: Employment, income and inflation
Percentage changes
2008 2009 2010 2011 2012
Employment 1.0 -1.8 -0.5 0.3 0.6
Unemployment rate1 7.4 9.3 9.9 9.6 9.2
Compensation per employee2 3.1 1.2 1.7 2.1 2.0
Labour productivity -0.3 -2.2 2.2 1.3 1.4
Unit labour cost 3.8 4.0 -0.7 0.3 0.2
Household disposable income 3.5 -0.1 1.7 2.1 2.4
GDP deflator 2.0 1.0 0.8 1.0 1.1
Harmonised index of consumer prices 3.3 0.3 1.5 1.3 1.2 Core harmonised index of consumer prices3 1.8 1.4 0.9 1.2 1.2 Private consumption deflator 2.7 -0.2 1.7 1.4 1.2 Note: Covers the euro area countries that are members of the OECD.
1. As a percentage of labour force.
2. In the private sector.
3. Harmonised index of consumer prices excluding energy, food, drink and tobacco.
Source: OECD Economic Outlook 88 database.
Euro area
1. Quarter-on-quarter percentage change.
2. National accounts basis.
Source: Eurostat and OECD, OECD Economic Outlook 88 database.
1 2 http://dx.doi.org/10.1787/888932345641 2002 2003 2004 2005 2006 2007 2008 2009 2010
-1.0 -0.8 -0.6 -0.4 -0.2 -0.0 0.2 0.4 0.6 0.8 1.0
%
6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0
%
Employment growth ¹ Unemployment rate
The labour market has stabilised
1970 1975 1980 1985 1990 1995 2000 2005 2010 0
2 4 6 8 10
0 20 40 60 80 100
% of GDP
% of GDP
General government deficit Gross debt ²
Government debt is at a high level
The labour market is stabilising
The unemployment rate has been broadly stable at around 10% over the year to September. However, there are large differences in performance among euro area countries. Employment has expanded somewhat since early 2010, the first increase in almost two years.
Inflationary pressures remain subdued
Headline annual inflation has risen modestly, boosted by higher energy prices and increases in administered prices. Core annual inflation has also risen but remains subdued at around 1%, reflecting the substantial economic slack. The growth of nominal hourly labour costs slowed further to reach 1.6% in annual terms in August. Inflation is likely 1 2 http://dx.doi.org/10.1787/888932347351
Euro area: Financial indicators
2008 2009 2010 2011 2012
Household saving ratio1 8.9 9.9 9.4 9.1 8.8
General government financial balance2 -2.0 -6.2 -6.3 -4.6 -3.5
Current account balance2 -0.8 -0.4 -0.2 0.3 0.9
Short-term interest rate3 4.6 1.2 0.8 1.1 1.8
Long-term interest rate4 4.3 3.8 3.4 3.6 4.3
Note: Covers the euro area countries that are members of the OECD.
1. As a percentage of disposable income.
2. As a percentage of GDP.
3. 3-month interbank rate.
4. 10-year government bonds.
Source: OECD Economic Outlook 88 database.
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Euro area: Demand and output
Fourth quarter 2010 2011 2012
Current prices
€ billion
Percentage changes from previous year, volume (2009 prices)
Private consumption 5 151.1 0.6 1.0 1.7 0.7 1.4 1.7 Government consumption 1 974.4 1.0 0.0 -0.1 0.9 -0.2 -0.1 Gross fixed investment 1 753.6 -1.0 1.6 2.8 1.6 1.9 3.2 Public 253.9 -3.4 -5.2 -4.4 -5.8 -6.0 -2.7 Residential 471.7 -3.6 0.4 1.7 -0.4 1.0 1.9 Non-residential 970.8 0.7 3.7 4.7 4.5 3.9 5.0 Final domestic demand 8 879.1 0.3 0.9 1.5 0.9 1.1 1.6 Stockbuilding1 - 67.9 0.6 0.1 0.0
Total domestic demand 8 811.2 0.9 1.0 1.5 1.7 1.1 1.6
Net exports1 119.3 0.8 0.7 0.6
GDP at market prices 8 930.5 1.7 1.7 2.0 2.1 1.7 2.1 Note: Detailed quarterly projections are reported for the major seven countries, the euro area and the total OECD in the Statistical Annex.
Covers the euro area countries that are members of the OECD.
1. Contributions to changes in real GDP (percentage of real GDP in previous year), actual amount in the first column.
Source: OECD Economic Outlook 88 database.
2009 2010 2011 2012
to remain subdued in view of the remaining slack, and inflation expectations are well anchored.
Monetary conditions have remained supportive
Monetary conditions have continued to support activity over recent months. The ECB’s main refinancing rate has remained at 1%, while short-term interbank rates have tended to rise towards this level as abundant liquidity support in the interbank market is scaled back. Further large long-term refinancing operations are due to expire in the coming months, although the ECB has committed to continuing refinancing operations on a full allotment basis at least until the end of 2010. Provided that the recovery remains on track, and given the weakness of inflation pressures and the expected fiscal consolidation, monetary policy stimulus should largely remain in place during 2011 and non-standard measures should continue to be wound down as conditions allow. The main refinancing rate should gradually be increased from the early part of 2012, unless higher than expected inflationary pressures emerge.
Fiscal consolidation is the immediate priority
The public finances are in poor shape. Deficits are large and debt is rising to high levels in many economies. Fiscal consolidation is already underway in some countries that have large debt burdens and are facing intense market pressures, but should begin in all euro area economies in 2011. Prolonged consolidation and tight public finances will be required in many countries to reduce the debt-to-GDP ratio to prudent levels and meet the 60% ceiling set out in the Stability and Growth Pact. Detailed medium-term consolidation plans should be set out in all euro area countries to increase the credibility of the consolidation process. The commitment to consolidation would be further enhanced by reforms to strengthen market discipline, the Stability and Growth Pact, and national fiscal institutions.
The recovery will gather strength going forward
The recovery is projected to continue, although growth is expected to have moderated during the second half of the year compared with the exceptionally strong pace in the second quarter. In 2011, consumption is projected to accelerate due to low interest rates, the recovery in household incomes and financial wealth, and as confidence recovers.
Private non-residential investment will increase as growth prospects improve, although the high level of excess capacity will constrain the pace 1 2 http://dx.doi.org/10.1787/888932347389
Euro area: External indicators
2008 2009 2010 2011 2012
$ billion
Foreign balance 150.9 168.9 174.5 264 340
Invisibles, net - 250.6 - 212.2 - 200.8 - 222 - 219
Current account balance - 99.7 - 43.2 - 26.3 42 121
Note: Covers the euro area countries that are members of the OECD.
Source: OECD Economic Outlook 88 database.
of the recovery. The necessary fiscal consolidation will be a drag on the recovery. With the fading support from the weaker effective exchange rate, contribution of exports to growth will be largely determined by the strength of world demand. The overall pace of recovery will be held back by continued rebalancing needs, the near-term weakness of potential output and underlying structural growth trends. The recovery will also be uneven, as large imbalances and lost competitiveness are gradually repaired in the countries with large debt overhangs and current account deficits.
The risks are broadly balanced
Substantial risks remain around the strength and pace of the recovery, although they are broadly balanced. Domestic demand may strengthen more rapidly than anticipated, as business investment may recover more strongly than projected. However, the euro area remains sensitive to financial market conditions and the strength of world trade.
Markets remain sensitive to the weakness in the fiscal position in some countries and this may lead to wider financial tensions, although the creation of the European Financial Stability Facility (EFSF) provides an important near-term crisis management mechanism. The quality of bank balance sheets and its impact on credit growth is another risk for growth and public finances.