The recovery has stalled as confidence has weakened and financial conditions have deteriorated as a result of the sovereign debt crisis. The momentum in domestic demand has waned and external demand is slowing sharply. Fiscal consolidation and adjustment of private sector balance sheets will continue to restrain demand growth. Unemployment will begin to rise again and there will be a wide margin of spare capacity. Inflation will fall, against the background of weak underlying price pressures. The announcement of the measures agreed at the October Euro Summit failed to restore confidence and needs to be followed up by swift mobilisation of adequate financial resources to ease contagion. To enhance fiscal credibility, euro countries should pursue consolidation plans set out in their Stability Programmes, while further monetary loosening is needed to help support activity. Provided that policy actions are sufficient to restore confidence gradually, activity should pick up somewhat from mid-2012. The main risks centre on the interactions of slow growth, sovereign debt and weaknesses in the banking system, as well as the ability of policymakers to find a credible solution to the debt crisis.