The European Commission (EC) said economic activity in the euro zone is still strong but warned that risks have risen due to market turmoil and the threat of a sharp slowdown in the US.
In its latest quarterly report on the euro zone economy, the EC said growth is expected to remain robust in the second half of the year after slowing unexpectedly to a mere 0.3 per cent in the second quarter.
Growth is expected to recover to 0.5 per cent during the third and fourth quarters, supported by sound fundamentals and a still-favourable global environment, it said.
But the EC warned: "While, so far, the euro area seems to have been fairly resilient against the deterioration of economic activity in the US, spillovers and contagion effects could become significantly stronger in the event of a more pronounced downturn."
It also said that as a result of the financial market turbulence, downside risks to the global economic outlook have "clearly increased, particularly for 2008". If the turmoil continues "for some time", it will lead to less favourable financing conditions and to tighter credit availability.
Equally, business and consumer confidence could suffer if the crisis were to last for some time, the EC reported. The commission said that if the risks materialise, they will mainly affect the real economy in 2008 and beyond.