Recently the Executive Board of the International Monetary Fund (IMF) concluded the Euro Area status. 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 European Central Bank (ECB) 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.K. referendum outcome. Helped by gradually rising energy prices, headline inflation is expected to increase from 0.2 percent this year to 1.1 percent next year.
At the same time, downside risks have grown. Externally, a further global slowdown could spill over and derail the domestic demand-led recovery. Domestically, the risks are largely political. Further spillovers from the U.K. post-referendum situation, the refugee surge, or a heightening of security concerns could contribute to greater uncertainty, hurting growth and hindering progress on policies and reforms.
Other risks include banking and financial sector weaknesses in some countries. Moreover, prolonged low growth and inflation themselves make the euro area increasingly vulnerable to shocks. Policy buffers to counter these risks are low. Medium-term prospects are mediocre, with crisis legacies of high unemployment, elevated public and private debt, and deep-rooted structural weaknesses weighing on the outlook and productivity growth.
As a result, growth five-years ahead is expected to be about 1.5 percent, with headline inflation reaching only 1.7 percent.