It is also possible that domestic cost pressures may turn out to be stronger than expected – a prospect that is supported by recent developments in wage and unit labour cost growth. 2 For all these reasons, our current assessment is that the risk of deflation in the euro area remains remote despite the expected weakness in economic activity this year.
The prospects for economic growth The latest data and survey indicators point to a substantial decline of real GDP in the fourth quarter of 2008 and to a continued weakness in economic activity in the euro area in the first half of this year. Confidence is at historically low levels, world trade has sharply declined and financing conditions remain tight.