Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP declined by 0.1 percent, quarter on quarter, in the third quarter of 2012, following a contraction of 0.2 percent in the second quarter. Available data continue to signal further weakness in activity in the fourth quarter and at the beginning of 2013. This weakness reflects the adverse impact of low consumer and investor sentiment on domestic expenditure, as well as subdued foreign demand. However, financial market sentiment has improved and the latest survey indicators confirm earlier evidence of a stabilization in business and consumer confidence, albeit at low levels. Later in 2013 a gradual recovery should start, with domestic demand being supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, and export growth benefiting from a strengthening of global demand.
The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate to the possibility of weaker than expected domestic demand and exports, slow implementation of structural reforms in the euro area, as well as geopolitical issues and imbalances in major industrialized countries which could both have an impact on developments in global commodities and financial markets. These factors have the potential to dampen the ongoing improvement in confidence and thereby delay the recovery.
According to Eurostat's flash estimate, euro area annual HICP inflation was 2.0 percent in January 2013, down from 2.2 percent in November and December and from 2.5 percent in October. On the basis of current futures prices for oil, inflation rates are expected to decline further to below 2 percent in the coming months. Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain contained.