Housing market downturns and Euro Area growth

Ray Barrell, Tatiana Fic, Sylvia Gottschalk and Iana Liadze

National Institute Economic Review, 2008, vol. 205, 21-33

Abstract: The Euro Area economy grew by 0.8 per cent in the first quarter of this year, and is proving more resilient than anticipated in our April forecast. We were then expecting a markedly less robust outturn of an increase of 0.4 per cent. However, despite this positive start, we still anticipate a downturn in the Euro Area's year-on-year economic growth. After peaking at 2.9 per cent in 2006, real GDP growth is projected to slow down to around 2 per cent over the forecast period. Sluggish domestic demand and diminishing contributions from net trade both contribute to this downturn. Household consumption is forecast to expand by 1 per cent in the short term, down from 1.6 per cent in 2007. Consumption growth is expected to be considerably weaker than in 2007 due to accelerating inflation and the slowdown in the growth of housing wealth, particularly in France, Ireland and Spain as well as elsewhere. Moreover, real disposable income growth is expected to slow down from 2 per cent in 2007 to about 1¼ per cent this year. Nominal wages are expected to rise by 3½ per cent on average this year, and HCP inflation is likely to pick up strongly to slightly more than 3¾ per cent per annum, 1½ percentage points above the level of last year.

Date: 2008
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