EURO AREA - OECD.org

1 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018135 euro AREAE conomic growth in the euro area is set to continue at a relatively dynamic pace ofjust above 2 per cent over 2018-19. Accommodative monetary policy, fiscal support andimproving labour markets are supporting domestic demand, notably through dynamicprivate consumption. Investment is strengthening, on the back of favourable financingconditions, strong global demand and the need to expand capacity. Inflation is expectedto strengthen gradually, as slack policy should be firmly committed to remaining accommodative as longas needed to attain the inflation objective, while preparing for a gradual euro area fiscal stance is projected to be slightly expansionary in both 2018 and2019.

2 As the expansion consolidates, governments should improve their fiscal positionsand reduce debt ratios. Improving skills, reforming product markets, completing thesingle market for goods and services, and progress with banking union, are the bestguarantee for stronger and more inclusive expansion continuesDynamic domestic and external demand are supporting robust growth. Privateconsumption has slowed, as inflation has picked up, but remains resilient thanks to strongemployment growth. Capital spending remains dynamic, supported by favourablefinancing conditions, robust demand and the need to replace obsolete recoveryin residential investment is supported by favourable financing conditions and risingincomes.

3 Despite a strengthening euro , trade growth was very strong in the second half of2017 on the back of robust growth in Europe and the rebound in world trade, and hascontinued at a solid, even if slower, pace in the beginning of 2018. However, in the firstquarter of 2018, high frequency indicators and quarterly GDP growth have softened,suggesting that the pace of growth has moderated somewhat from the high levels seen atthe end of areaSource:OECD Economic Outlook 103 2 2 101234681012142010 2011 2012 2013 2014 2015 2016 2017 2018 2019Y o y % changes % of labour force Employment Unemployment rate Unemployment keeps falling while employment growth stabilises 4 20246 4 202462010 2011 2012 2013 2014 2015 2016 2017 Y o y % changesLoans to non financial corporationsLoans to households for house purchaseCredit growth has been recovering 3.

4 DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018136 euro area :Demand, output and prices1 2 prices EUR billionGDP at market prices10 Private consumption5 Government consumption2 Gross fixed capital formation1 Final domestic demand9 Stockbuilding1 Total domestic demand9 Net exports1 Memorandum itemsGDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force)

5 Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 103 database. Percentage changes, volume(2014 prices)Note: Aggregation based on euro area countries that are members of the OECD, and on seasonally-adjusted and calendar-days-adjusted basis.

6 euro area1. Harmonised consumer price indices, net of energy and food products as for core Nominal wages per Measured in per cent of potential :OECD Economic Outlook 103 2 101234 1012342010 2011 2012 2013 2014 2015 2016 2017 2018 2019Y o y % changes Headline inflation Core inflation Wages Inflation is below target but will gradually rise 2 1012 % ptsAnnual change in the underlying primary balance The fiscal stance will be slightly expansionary3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018137 Labour market conditions keep improving.

7 Unemployment has fallen to a nine-yearlow. Labour force participation has increased in a number of countries, pointing to ahealthy recovery in the labour market. Nonetheless, there have not yet been signs of strongreal wage growth, despite improving labour markets. Despite dynamic growth, headlineconsumer price inflation remains moderate, held in check by the euro appreciation, as wellas still remaining slack in labour markets. Core inflation remains are needed to generate sustained improvements in living standards andstrengthen resilienceIn March, the ECB removed the explicit pledge to increase or extend asset purchases inits communication, which is appropriate given that deflation risks have receded andmonetary policy will have to gradually shift to a less accommodative stance as the recoverycontinues.

8 As inflation is set to progressively return to the objective of below, but close, to2%, the ECB is projected to gradually reduce its monetary support. A cautious and gradualreduction of support is warranted in an environment of below-target inflation andcontinuing labour market slack in many countries, and to avoid potential disruptions infinancial markets. An upturn in inflation, as projected, will allow the ECB to reduce assetpurchases from October 2018 and end them in December 2018, and then to increase thedeposit rate by 25 basis points in the second half of the euro area as a whole, the fiscal stance is expected to remain slightlyexpansionary in 2018 and 2019.

9 Public debt-to-GDP ratios remain above historical averagesin many countries. As the recovery continues, governments should ensure thatdebt-to-GDP ratios fall significantly by improving fiscal positions further and byintroducing structural reforms to strengthen growth. The credibility and effectiveness ofthe EU fiscal governance should also be strengthened with simplified fiscal progress to complete the banking union by creating a common fiscal backstopto the Single Resolution Fund, as well as an agreement on the European Deposit InsuranceScheme, remains key to strengthen the financial stability of the euro area banking sectorand to enhance the resilience of the euro improvements in living standards are held back by weak productivitygrowth and investment in many countries.

10 There is ample scope for product marketreforms to boost competition and enhance diffusion of new technologies in manycountries. Faster implementation of Europe's digital single market and the swiftcompletion of the single market in network sectors and services would foster investmentand productivity growth. Investment needs are particularly important in trans-Europeantransport and energy will remain strongGDP growth is projected to average just over 2% per annum in 2018-19, supported byaccommodative monetary policy, some fiscal support and a recovering global consumption growth will expand at a moderate, but robust, pace, benefiting fromrising employment and stronger disposable income growth, as wages are expected to risefaster than in the past.