Markets’ continued concern about the euro-zone fiscal outlook has prompted the euro to depreciate further and peripheral government bond yields to remain high over the past month. Worryingly, there are tentative signs that markets’ gloom may be starting to damage business and consumer confidence too. For now at least, business surveys still point to a pickup in GDP growth. (See Chart.) But once austerity measures start to hit firms’ and consumers’ pockets, confidence is likely to fall further, leading the economic recovery to fade.
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