• After five quarters of contraction, eurozone GDP will resume growing in 3Q. We see GDP up 0.4% (with risks for an even stronger outcome), which we consider to be broadly in line with the area’s growth potential after the crisis. The industrial sector leads the way up, as the export revival and inventory rebuilding leave their mark. However, GDP should decelerate already in 4Q and for 2010 we confirm our 0.8% forecast. Euro appreciation increasingly looks like a threat to the recovery.
  • The credit crisis has severely impacted euro area residential investment, which started to decline fast in spring 2008. Housing investment is unlikely to recover in the near term because both supply and demand indicators continue to look weak. We see another leg of correction in residential investment that will last for the whole of 2010, though the pace of contraction is set to ease progressively. House prices, which follow with a lag and probably started declining outright at the beginning of this year, should continue to fall throughout 2010, though in an orderly way.
  • Oil prices are on the rise, but we confirm both our CPI forecasts (0.3% this year and 1.3% in 2010) and the risk scenario, still seen as broadly balanced. We argue that downside risks to our medium-term food inflation outlook allow our CPI projections to absorb temporary spikes in oil prices (within a rising trend) without the need for substantial revisions.
  • The final months of the year are traditionally characterized by demand for liquidity as investors square their books. That’s a supportive factor for the shorter maturities. In addition, inflation remains low, and central banks are in no hurry to start talking about rate hikes. The environment should be supportive mainly for the 2/5-year sector.
  • More risk appetite and higher stock markets should continue to support a firmer EUR-USD, but this alone will not be enough to boost EUR crosses, like EUR-JPY, EUR-CHF and EUR-GBP, as USD behavior across the board will be critical as well.