The composite output Purchasing Managers’ Index – which is closely correlated with growth in the euro area – still remains above its long-term average and is close to a 12-year high. While risks to growth remain broadly balanced, those related to global factors, including the threat of increased protectionism, have become more prominent.
If economic agents perceive a negative productivity shock to be permanent, they will feel poorer and reduce their spending in proportion to the perceived decrease in wealth. If, however, they perceive this shock to be transitory, economic agents’ perceived wealth will remain more or less unchanged and the fall in demand will be muted.