Corporate balance sheet adjustment shapes euro-area economic outlook

The Third Quarter 2010 edition of the Quarterly Report on the Euro Area highlights that although output growth in most euro area Member States has improved, the ongoing balance sheet adjustment process in the corporate sector will influence the recovery ahead. The analysis of previous episodes of corporate balance sheet adjustment shows that they have been associated with sizeable negative macroeconomic consequences, including weak GDP growth due to lower investment rates and falls in labour compensation. It is therefore crucial to counteract these dampening forces on growth by frontloading growth-enhancing reforms.