area in 2008, albeit to a lesser extent than during 2007. while moderating, growth in the world economy is expected to remain resilient, benefiting in particular from strong growth in emerging economies. this should continue to support euro area external demand. meanwhile, investment growth in the euro area should provide ongoing support to economic activity, as capacity utilisation remains solid and profitability in the non - financial corporate sector has been sustained. at the same time, employment and labour force participation have increased significantly and unemployment rates have fallen to levels not seen for 25 years. this supports real disposable income and thus consumption growth, although purchasing power is being dampened by the impact of higher energy and food prices. the uncertainty surrounding this outlook for economic growth remains high, and downside risks prevail. in particular, risks relate to the potential for the financial market turbulence to have a more negative impact on the real economy than previously anticipated. moreover, downside risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices. risks also arise from protectionist pressures and the possibility of disorderly developments owing to global imbalances. with regard to price developments, annual hicp inflation has remained above 3 % for the past six months. according to eurostat ’ s flash estimate, it was 3. 3 % in april 2008. this outturn confirms the ongoing strong short - term upward pressure on inflation, resulting largely from sharp increases in energy and food prices at the global level in recent months. looking ahead, on the basis of current futures prices for these commodities, the annual hicp inflation rate is likely to remain significantly above 2 % in the coming months, moderating only gradually over the course of 2008. accordingly, we are currently experiencing a rather protracted period of high annual rates of inflation. in order to ensure that current high inflation rates remain temporary, it is imperative that they do not become entrenched in longer - term expectations or lead to broadly based second - round effects in wage and price - setting. the risks to the outlook for inflation over the medium term remain clearly on the upside. these risks include the possibility of further rises in energy and food prices, as well as of increases in administered prices and indirect taxes beyond those foreseen thus far. most importantly, there is a risk that price and wage - setting behaviour could add to inflationary pressures. in particular, the pricing power of firms, notably in

market segments with low competition, may prove stronger than currently expected. moreover, higher than expected wage growth may emerge, taking into account high capacity utilisation, tight labour market conditions and the risk of second - round effects owing to the high level of current inflation rates. against this background, it is imperative that all the parties concerned, in both the private and the public sector, meet their responsibilities. wage - setting needs to take into account productivity developments, the still high level of unemployment in many economies, and price competitiveness positions. moderate labour cost increases are particularly necessary in countries which have lost price competitiveness in recent years. second - round effects stemming from the impact of higher energy and food prices on price and wage - setting behaviour must be avoided. in this context, the governing council is concerned about the existence of schemes in which nominal wages are indexed to consumer prices. such schemes involve the risk of upward shocks in inflation leading to a wage - price spiral, which would be detrimental to employment and competitiveness in the countries concerned. the governing council therefore calls for such schemes to be avoided. the governing council is monitoring wage negotiations in the euro area with particular attention. in the view of the governing council, continued responsible wage agreements are of key importance in order to preserve price stability in the medium term and thereby the purchasing power of all euro area citizens. the monetary analysis confirms the prevailing upside risks to price stability at medium to longer - term horizons. annual m3 growth remained very vigorous at 10. 3 % in march, supported by the continued strong growth of mfi loans to the private sector. at the same time, annual m1 growth continued to moderate in march, reflecting higher short - term interest rates which encouraged further shifts from overnight into time deposits. while the impact of the flat yield curve and other temporary factors suggest that annual m3 growth currently overstates the underlying pace of monetary expansion, nonetheless, even after taking such effects into account, a broad - based assessment of the latest data confirms that the underlying rate of money and credit growth remains strong. the growth of household borrowing has moderated over recent months, reflecting the impact of higher short - term interest rates and cooling housing markets in several parts of the euro area. however, the growth of loans to non - financial corporations has remained very robust. while some future moderation can be expected in the light of tightening financing conditions and slower economic growth, bank borrowing by euro area non - financial corporations grew at an annual rate of 15. 0 % in