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The euro area economy contracted in the last quarter of 2001, but a gradual recovery is shaping up as confidence returns, depleted inventories are rebuilt and international trade picks up. Private consumption holds the key for the recovery gaining momentum in the first half of the year. Euro area growth is expected to accelerate in the second half and reach output potential in the fourth quarter of 2002. An average growth of close to 3.0% is forecast for next year. Despite a temporary rise in unemployment in 2002, employment creation will continue and 1.8 million new jobs are expected to be created in the euro area over the next two years. In 2003 the average unemployment rate is expected to fall below its 2001 rate. Inflation is expected to fall during the second quarter of 2002 and average inflation is expected to be close to 2.0% for both this year and next. The general government deficit in the euro area is expected to widen for two consecutive years, for cyclical reasons, reaching 1.4 % of GDP in 2002. However, the underlying structural balance is not expected to deteriorate in 2002 as Member States are committed to realise government accounts close to balance or in surplus from 2003 or 2004.