Euro area recovery broadly on track but outlook weakening

Since the ECB's June forecasts, GDP growth has broadly developed as expected, rising 0.3% qoq in Q2, while inflation stood at 0.2% in July, affected by renewed weakness in energy prices. Looking ahead, the ECB is likely to reduce its forecast for headline inflation in light of lower oil price assumptions. In June the ECB expected headline inflation to be 0.3% this year and 1.5% next. 

On GDP growth, despite forward-looking indicators pointing to continued growth in H2, the ECB may reduce its forecast for next year (1.9%, consensus is at 1.8%) in light of stronger headwinds from global demand. The outlook for household consumption should remain resilient, however. Risks are likely to remain on the downside due to China and emerging markets. In response, inflation expectations have again moved down significantly, raising questions over what the ECB can do.