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International Monetary Fund. European Dept.
This 2016 Article IV Consultation highlights that the recovery in euro area has strengthened recently. Lower oil prices, a broadly neutral fiscal stance, and accommodative monetary policy are supporting domestic demand. However, inflation and inflation expectations remain very low, below the European Central Bank’s medium-term price stability objective. Euro area GDP growth is expected to decelerate from 1.6 percent in 2016 to 1.4 percent in 2017, mainly owing to the negative impact of the U.K. referendum outcome. Growth five years ahead is expected to be about 1.5 percent, with headline inflation reaching only 1.7 percent.
International Monetary Fund. European Dept.
Following a deep recession in 2020 and further contraction in 2021Q1, the euro area economy recovered rapidly in the second and third quarters thanks to high vaccination levels, increasing household and business adaptability to the virus, and continued forceful policy support. Looking ahead, while supply chain disruptions, elevated energy prices, and resurgences of Covid-19 cases—including those related to the Omicron variant—are likely to pose near-term headwinds to growth, the recovery is set to continue in 2022 as the impact of the pandemic on economic activity continues to weaken over time and supply-side constraints ease. Medium-term output losses relative to pre-crisis trends will vary significantly across countries and sectors as will the extent of labor market scarring. Price pressures are building up as production bottlenecks are set to persist for a while. However, inflation—despite increasing significantly in recent months due to transitory factors—is projected to moderate during 2022 and remain below the ECB’s inflation target over the medium term. Uncertainty surrounding the outlook remains high and largely related to pandemic dynamics and legacies, including induced behavioral and preference changes.
International Monetary Fund. European Dept.

On July 6, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with the Euro Area. The recovery has strengthened recently. Lower oil prices, a broadly neutral fiscal stance, and accommodative monetary policy are supporting domestic demand. However, inflation and inflation expectations remain very low, below the ECB’s medium-term price stability objective. Euro area GDP growth is expected to decelerate from 1.6 percent this year to 1.4 percent in 2017, mainly due to the negative impact of the U

International Monetary Fund

area, adding to already-severe pressures on many bank and sovereign balance sheets and raising questions about the viability of the monetary union itself. Economic activity has weakened and is likely to remain subdued, particularly in the hard-hit periphery countries. After averaging 1.5 percent in 2011, euro area GDP growth is expected to be -0.3 and 0.7 percent in 2012 and 2013, respectively. In this context, headline inflation is projected to fall well below 2 percent by 2013 and to remain there through 2014. Strong headwinds to growth—including much tighter

International Monetary Fund. European Dept.

unchanged ( Table 1 ) . The recent surge in Covid-19 cases across Europe led to renewed mobility restrictions in many countries, slowing the recovery of services. In addition, elevated energy prices and supply chain disruptions continued to weigh on manufacturing. To reflect these developments, projections were revised in the January 2022 Update of the World Economic Outlook along the following lines: Euro area GDP growth in 2022 has been revised down to 3.9 percent (-0.3 p.p. relative to the staff report projections), reflecting carryover from slower growth in

International Monetary Fund. European Dept.

initially by 0.2 percentage point and be negative 0.7 percent in 2021. Moreover, slower productivity growth and reduced investment over the medium-term would lower potential growth and push up unemployment by 0.4 percentage point in 2021. Euro Area: GDP Growth Simulations (Percent) Sources: IMF, World Economic Outlook; and IMF staff calculations. Euro Area: Inflation Simulations (Percent) Sources: IMF, World Economic Outlook; and IMF staff calculations. 16. The downturn would erode already limited fiscal buffers . Government deficits would

International Monetary Fund. European Dept.

continued to expand in the first half of 2018, driven by domestic demand. However, there are signs of softening in Romania, Turkey, and the United Kingdom. Also, in the euro area, GDP growth cooled further to 0.2 percent in the third quarter (quarter-on-quarter, annual rate), from 0.4 percent in each of the first two quarters. The deceleration was mainly due to weaker external demand (especially for goods), special factors (inclement weather, car production), and base effects in the first quarter of 2018. In most Central, Eastern, and Southeastern European (CESEE

Marco Lombardi, Mr. Raphael A Espinoza, and Fabio Fornari

areas. 2 In fact Dees, di Mauro, Smith and Pesaran (2005) show, using a Global VAR model, that a 4 percent fall in U.S. real equity prices not only reduces U.S. output by 0.4 percent within a year, but also depresses European financial markets by around 4 percent and euro area GDP growth by 0.4 percent in the second year after the shock. Bayoumi and Swiston (2007) also argued that global financial conditions are the most relevant channel of transmission and typically swamp the impact on growth played by the trade channel or the commodity price channel. There are