Euro area: Slower growth ahead

A fter strong growth during the summer months, data out of the euro area w as pointing to a moderation of the economic expansion as bottlenecks were holding the manufacturing sector back . The recent surge in infections and new lockdown measures in some countries will have an additional dampening effect , bringing sequential growth to below 1% at the end of 2021 . We see the current period of sluggish growth to extend to the beginning of next year. Starting from Spring 2022 onwards , however, we foresee a softening of lockdown measures and supply side bottlenecks , leading to a re-acceleration of growth to above trend . The euro area has s till some “catch up” to do and we forecast the economy to reach its pre-pandemic trend path only by the end of 2023. We therefore expect the euro area to grow above trend – 4.3% and 2.9% – over the next two years , barring yet another infection wave and lockdowns in 2022 . Domestic demand will be the main driver of growth , with private consumption and investment spending contributing around two-thirds of the growth we forecast over the next 2 years. We continue to expect headline inflation to peak by the end of this year and to start a gradual decline during the first half of 2022, falling again below 2% by the middle of the year.