European commission cuts growth forecast

Dearer oil and higher interest rates prompted the European commission to cut its forecast for growth in the Eurozone in the first nine months of this year, Brussels said yesterday.

The commission said it overestimated the speed of recovery this year, dampening hopes of a rapid upswing in the 12-nation single currency area.

GDP growth is now forecast between 0.4%-0.8% in the first quarter, 0.3%-0.8% in the second and 0.2%-0.8% in the third, lower than the predicted growth of 0.4%-0.9% in all three quarters back in March.

However the European Central Bank, responsible for setting interest rates in the eurozone, said yesterday it remained confident about the prospects for the economy. Its monthly bulletin echoed the statements last week by Jean-Claude Trichet, the ECB president, that outlook for growth in the eurozone has improved and interest rates are very low.

"The risks to economic growth appear to be broadly balanced over the shorter term," the bulletin said.

But economists said the lower quarterly forecasts were more realistic and still consistent with the ECB's projection of 2.1% growth this year in the 12 countries using the euro. Howard Archer, economist at Global Insight, said: "The European commission's new forecasts fit in very closely to our own view of growth being pretty healthy in the near term, but softening a little later this year. We expect the Eurozone to see reasonably strong growth through to the third quarter, supported by relatively buoyant exports and healthy investment.

"However, we anticipate that eurozone growth will lose some momentum towards the end of this year due to a stronger euro, some moderation in global growth and still elevated oil prices."

Optimism from the ECB was not unfounded. Last month the manufacturing PMI in the eurozone moved above its US counterpart for the first time in three years and consumer credit continues to boom, signalling potential for growth.

Yet survey evidence has been significantly brighter than most hard data released. Eurostat, the EU statistics office, confirmed that eurozone growth slowed to a quarterly 0.3% in the last three months of 2005, from 0.7% in the prior quarter owing to limited growth in consumption and negative trade contributions.