The euro area economy has slipped into recession this year, with tighter financial conditions, negative wealth effects, weaker housing market activity and greater uncertainty all reducing domestic demand. Growth is expected to remain below potential until the middle of 2010, before picking-up as the effects of monetary policy easing and the dissipation of stress in global financial markets emerge. Lower commodity prices and the emergence of a sizable negative output gap will dampen inflationary pressures, with headline inflation projected to fall to around 1½ per cent during 2009.