Economic Sentiment Indicator & Selected Components

-50 -40 -30 -20 -10 0 10 20 60 50 70 80 90 100 110 120 2008 2009 2010 2011 2012 2013 2014 Fe b Ma y Au g No v Fe b Ma y Au g No v Fe b Ma y Au g No v Fe b Ma y Au g No v Fe b Ma y Au g No v Fe b Ma y Au g No v Fe b Ma y Au g No v

Table 3: Growth in Expenditure Components of Euro Area GDP

2013 2014 Q4 Q1 Q2 Q3 Consumption 0.1 0.2 0.3 0.5 Government 0.3 0.1 0.3 0.3 Investment 0.7 0.3 -0.6 0.2 Inventories -0.3 0.1 -0.1 0.0 Exports 0.8 0.4 1.4 0.8 Imports 0.2 0.4 1.3 1.2 GDP 0.2 0.3 0.1 0.2 Source: Eurostat.

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Quarterly Bulletin 01 / January 15

GDP and was also related to the weak rate of investment.

Early data for the final quarter point towards a very modest Q4 increase in euro area GDP. However, seasonally-adjusted exports fell by 0.3 per cent and imports by 1.3 per cent against a background of weak world demand, in October 2014 compared with September 2014, Euro area industrial production data for October confirm that economic activity in Q4 started weak. The 0.1 per cent monthly rise in production was less than September’s (downwardly-revised) 0.5 per cent increase. However, had it not been for a 9 per cent monthly surge in Irish industrial production, euro-zone production would probably have fallen on the month.

Looking forward, the industry surveys such as the manufacturing PMI continue to point to negative production growth, suggesting that industrial production could stall again in the months to come. The indication from the various business surveys is that, with the global environment highly uncertain, the positive impact of the weaker currency on both export prospects and investment intentions has so far been muted. Recent survey data continue to point to a slight pick-up in sentiment in the euro area, although the pace of improvement has decelerated somewhat. December’s euro area PMI survey suggests that the euro area economy lost some steam in the final quarter of 2014. Although the composite PMI rose from November’s 51.1 to 51.4 – below a consensus forecast of 51.5 – that only partially reversed the fall in the previous month and left an average reading in Q4 of 51.5 compared to an average reading of 52.8 for the third quarter. The EU Commission’s Economic Sentiment Indicator (ESI) also remained broadly stable, marginally above its long-term average, for the final quarter of 2014. Industrial confidence, in particular, has picked up recently and reflects a more positive assessment of the current levels of overall order books. However, euro area consumer confidence has been falling since mid-2014. This has been primarily impacted by a sharp fall in confidence in France and, more recently, Germany, reflecting worsening views regarding the future general economic situation, savings intentions and

unemployment. At the same time, consumers’ expectations of their household’s financial situation remained broadly unchanged. Euro area employment increased further by an annualised 0.2 per cent in Q3, while labour productivity per person employed increased by 0.4 per cent on an annual basis. The numbers unemployed decreased during 2014 in most countries, with the notable exceptions of Italy and Finland. However, due to a slight shrinking in the labour force, the unemployment rate has remained stable at 11.5 per cent since August 2014. Youth unemployment remains stubbornly high in the euro area, most notably in the southern periphery, while long-term unemployment also remains elevated. Economic Growth – Outlook

After several downward revisions, euro area GDP growth is expected to remain low during the fourth quarter, with the pace of growth only likely to pick up towards the end of 2015. A gradual recovery in domestic demand is expected to be the only driver of growth as the year progresses. The drag on private consumption from high unemployment rates in some countries is expected to attenuate slowly, while ample spare capacity will continue to hold back investment spending. Demand from the euro area’s main trading partners is expected to hold its current pace, allowing net exports to augment growth, albeit at a very modest rate. Looking ahead, a very accommodative monetary stance and fewer constraints on credit supply are expected to support a pick-up in investment. However, without a substantial increase in the contribution of net exports, machinery and equipment investment may not give the impetus required. Government consumption, having been fairly constrained over 2014 reflecting ongoing fiscal consolidation across the euro area, is expected to pick up slightly in 2015. Consumption is expected to gain most momentum as labour markets stabilise, fiscal tightening decreases and disposable income recovers further. Inflation is expected to remain low, supporting real incomes. Imports are expected to pick up Developments in the International

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and Euro Area Economy

throughout the year in response to growing domestic demand with the effect that these could neutralise the growth contribution of exports, especially if these have high import content. The net trade position is not expected to contribute to GDP growth during 2015. In their December “Broad Macroeconomic

Projections Exercise”, ECB staff substantially

revised their forecast for 2015 down to 1.0 per cent, while projecting 1.5 per cent growth in 2016. The risks to the forecasts are judged to be on the downside. In particular, external factors including a weaker outlook for exports reflect a lower pace of euro area foreign demand over the projection horizon. With the pace of potential output estimated to remain below 1 per cent for another two years, the output gap will close only slowly.

Inflation – Recent Developments

Headline year-on-year inflation in the euro area, which began trending downwards in late 2011, remained persistently low in 2014. Inflation fell below zero in December for the first time since 2009, declining to -0.2 per cent, down

from 0.3 per cent in November. The decline in inflation was primarily driven by the energy component as a result of the sharp decline in oil prices that occurred towards the end of 2014. Inflation rates will fall further at the beginning of 2015, reflecting recent declines in oil prices. While lower food and energy prices account for a significant proportion of the decline in euro area inflation rates over the past two years, core inflation has also declined considerably. HICP excluding food and energy was 0.7 per cent in December 2014, the joint lowest this measure of core inflation has ever recorded. The two sub-components that make up this measure have continued to record relatively low readings. Non-energy industrial goods inflation was zero and services inflation was 1.2 per cent in December.

Both hard and soft data continue to indicate limited price pressures in the pipeline.

Producer prices have been in negative territory for nineteen months. Producer price inflation (excluding construction) declined by 1.3 per cent year-on-year in October 2014. Regarding forward-looking survey indicators, both PMI input and output prices in the manufacturing % Year-on-Year Change