The economic fundamentals of the euro area are sound and there are no major imbalances that would require a lengthy process of adjustment. The expectation of a recovery in the euro area in 2002 is furthermore supported by favourable financing conditions and by real disposable income benefiting from past and expected future declines in inflation. There is also increasing confirmation that economic activity outside the euro area is picking up, which should lead to a gradual strengthening of the external demand for euro area products and services. While the strength of the recovery remains uncertain, there are good reasons to expect a return of economic growth to levels in line with potential towards the end of the year. Turning to short-term price developments, annual consumer price inflation picked up substantially in January. Part of this increase was expected, as it related to base effects stemming from falling energy prices in early 2001 and to higher indirect taxes in some euro area countries. Furthermore, the increase reflected a considerable rise in unprocessed food prices due to adverse weather conditions in parts of Europe. Part of the latter effect seems to have been reversed in the meantime, as preliminary data for February indicate. Some increases have also been observed in oil prices and in the rate of growth of services prices in January.
The more efficiently euro area product and capital markets function, the greater the success of labour market reforms will be in creating employment opportunities. We are now at your disposal for questions. 2  BIS Review 15/2002