While spending on services is resilient, manufacturing firms are facing weak demand
Surveys point to a gradual recovery over the course of this year, led by services.
This recovery is expected to be supported by rising real incomes
The growth of euro area exports should pick up over the coming quarters, as the global economy recovers and spending shifts further towards tradables.
Monetary policy should exert less of a drag on demand over time.
The unemployment rate is at its lowest level since the start of the euro.
The tightness in the labor market continues to gradually decline, with employers posting fewer job vacancies.
Governments should continue to roll back energy-related support measures so that disinflation can proceed sustainably.
Inflation has continued to decline, from an annual rate of 2.6% in February to 2.4% in March. However, services price inflation remained high in March, at 4.0%.
Most measures of underlying inflation fell further in February, confirming the picture of gradually diminishing price pressures.
More recent indicators point to further moderation in wage growth.
Inflation is expected to fluctuate around current levels in the coming months and to then decline to the 2% target next year.
Measures of longer-term inflation expectations remain broadly stable, with most standing around 2%.
The risks to economic growth remain tilted to the downside.
Growth could be lower if the effects of monetary policy turn out stronger than expected.
A weaker world economy or a further slowdown in global trade would also weigh on euro area growth.
Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are major sources of geopolitical risk.
Growth could be higher if inflation comes down more quickly than expected and rising real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected.
Upside risks to inflation include the heightened geopolitical tensions, especially in the Middle East
Inflation could also turn out higher than anticipated if wages increase by more than expected or profit margins prove more resilient.
Inflation may surprise on the downside if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly.