Euro zone economic growth is expected to slow to 1.8 per cent this year from 2.7 per cent in 2007, and inflation should stay well above the European Central Bank target, the European Commission (EC) said today.
In a twice-yearly interim forecast, the EU executive said growth would be weaker because of turmoil in financial markets, a sharp economic growth slowdown in the United States, and high commodity prices.
The EC forecast is still more optimistic than the 1.6 per cent expected by economists in a Reuters poll on February 19th.
European Commission forecast
Consumer price growth in the 15 countries using the euro, which the ECB wants to keep just below 2 per cent, would be 2.6 per cent on average this year, against 2.1 per cent last year, driven by high food and energy prices.
But the xommission said that by the end of the year, inflation should fall back to just above 2 per cent in the euro zone if food and commodity price growth tapered off.
The ECB moved its monetary policy stance from a tightening bias to neutral earlier this month amid growing signs that the economy was slowing rapidly.
But record high inflation in the euro zone of 3.2 per cent in January makes it difficult for the bank to cut rates in support of growth like the US Federal Reserve.
But economists expect the ECB to start cutting rates in the second quarter of this year from the current 4 per cent to 3.5 per cent by year-end.
The ECB will issue its own update of growth and inflation forecasts in early March.