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Wednesday, the European Commission sharply lowered its growth forecast for Eurozone as the downside risks identified in its earlier forecast materialized, with the intensifying financial turmoil and the correction in housing markets impacting the economy. 

In its latest interim forecast, the European Commission, or EC downwardly revised the Eurozone economic growth forecast for 2008 to 1.3% from its earlier prediction of 1.7%. In its Spring forecast in April, the commission had anticipated the GDP growth to ease to 1.7% in 2008 from 2.7% in 2007.

According to the EC, the GDP growth in the European Union is expected at 1.4% this year, down from the Spring forecast of 2%.

The Brussels-based EC said Germany, Spain and the UK economies would fall into recession this year. The German economy, the largest in Eurozone, contracted 0.5% in the second quarter and the EC forecast negative growth of 0.2% for the third quarter. Spain is forecast to record negative growths of 0.1% and 0.3% in the third and fourth quarters respectively. The UK economy is also expected to experience contractions of 0.2% each in the third and fourth quarters of 2008. A technical recession is defined as two straight quarters of declining output.

Further, the EC sharply lowered the whole year growth forecast for France to 1% from 1.6% and the Spanish growth projection to 1.4% from 2.2%. While it maintained the growth estimate for Germany at 1.8%, the UK GDP growth projection was reduced to 1.1% from 1.7%.

Activity indicators namely industrial output, orders and retail sales signal a deceleration in the underlying growth momentum and recent surveys suggested a gloomy outlook for the EU economies.

Joaquín Almunia of Economic and Monetary Affairs Commissioner said, `Moving ahead with Europe`s reform agenda is crucial to continue creating jobs and to cope better with external shocks.`

On the price level front, the EC raised its Eurozone inflation forecast to 3.6% from 3.2%, reflecting the worse than expected outcome since the Spring forecast.

Meanwhile, inflation in the European Union is seen at 3.8% compared with 3.6% earlier. The EC added that inflation could be at a turning point as the impact of recent rises in energy and food prices gradually fades in the coming months.

Though oil prices have dropped from their highs recorded in summer, commodity prices have fueled inflation since the last quarter of 2007. The EC expects that the easing of inflation would possibly underpin household`s disposable income and spending in the fourth quarter, which would act as one of the factors that may bring about a turn in the trend.

The EC slightly raised the German inflation forecast to 3% from 2.9%. Meanwhile, the French inflation forecast was hiked to 3.5% and the Italian consumer price inflation prediction was raised to 3.7%.

Looking ahead, the EU commission assessed that the risks to the growth outlook are tilted to the downside. Developments in commodity and financial markets would continue to outline the growth outlook. Other risks to growth relate to the underlying strength of the U. S. economy and the ability of the EU economies to change their internal as well as external imbalances.

At the same time, risks to the inflation outlook stays somewhat more balanced, though tilted to the upside. Future commodity market developments and the ability to curb second-round effects would be key for the inflation outlook.

On August 2, the Organization for Economic Co-operation and Development had lowered the growth forecast for Eurozone to 1.3% from 1.7% in the current year. According to the think tank, the 15-nation economy will grow 0.4% in the third quarter and then at a faster pace of 0.8% in the last quarter. The British economy is forecast to slip into recession in the second half of the current year.

Elsewhere, the European Central Bank President, Jean-Claude Trichet said, `The current episode of weak economic growth is expected to be followed by a gradual recovery.` He also added that the monetary analysis confirms the continuing upside risks to price stability at medium to longer horizons.
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