This deceleration will clearly have some dampening effects on euro area net exports. The euro area is a large economy where exports of goods and services amount to around 17% of GDP only. Economic activity in the euro area is therefore determined mainly by domestic factors. Overall, the fundamentals of the euro area remain broadly favourable. While, as recently published data show, real GDP growth slowed somewhat in the second half of last year, the level of business and household confidence has remained high, supported by, inter alia, high degrees of capacity utilisation and ongoing unemployment declines. Moreover, real income in the private sector will benefit from lower oil prices and from the reductions in direct taxes in 2001. Hence, while downside risks to real GDP growth exist, growth is very likely to continue at a reasonably robust pace. Developments in the euro area bond markets are in line with this outlook for economic activity. Moreover, inflationary expectations implied by bond yields confirm that the financial markets expect current levels of consumer price inflation to be temporary, and price stability to be maintained in the medium term. This assessment may also have been reinforced by the recent moderation in oil prices and the movement of the euro exchange rate in the period since the end of October 2000. BIS Review 8/2001  1  Lower oil prices and the appreciation of the euro have already produced some effects on price developments.
Starting with the first pillar of the monetary policy strategy of the ECB, monetary data for December 2000 confirmed the gradual moderation of the growth of monetary aggregates which has been observed since the spring of last year. According to the latest data, the three-month average of the annual growth rates of M3 in the months from October to December 2000 stood at 5.0%, which was slightly lower than the average of 5.1% recorded for the period from September to November 2000. Therefore, after the recent slowdown in monetary growth, the risks to price stability from the monetary side have become increasingly balanced. Caution still needs to be exercised, however, given the continued dynamics in credit growth to the private sector and the upward deviation of M3 from the reference value in the past. Turning to the examination under the second pillar, broadly similar indications are emerging, as inflationary impulses resulting from previous developments in oil prices and the external value of the euro are gradually diminishing. As regards economic activity, uncertainty concerning the external environment for the euro area has increased, mainly related to signals that the slowdown in growth in the United States may be more significant than earlier expected. This is likely to result, directly and via a spillover to other regions, in some deceleration of growth in the world economy. World real GDP growth, which in 2000 posted its strongest performance for many years, may therefore moderate in 2001 but will still remain at an acceptable level.