Eurozone growth forecast cut sharply by European Commission

The European Commission has cut sharply its growth forecast for the eurozone, warning that the "difficult process of rebalancing will last for some time".

It now projects the bloc will narrowly avoid recession next year, growing by 0.1%, compared with its previous estimate of 1% growth, and thinks the EU economy will shrink this year.

Unemployment would also continue to rise next year, the Commission said.

The revision helped push global stock markets lower.

The Paris and Frankfurt exchanges closed down 2%, while London's FTSE 100 ended the day 1.6% lower. New York's Dow Jones lost 313 points, or 2.4%, at 12,933, its lowest level since early August.

The euro also weakened against the dollar following the revision, falling by half a cent to $1.278. Against the pound, it fell by a fifth of a pence to 79.93p.

Figures released earlier on Wednesday showing the biggest monthly fall in German manufacturing output since April, also weighed on markets.

As did concerns about the upcoming so-called fiscal cliff in the US, now that the US election has been won by Barack Obama.

"Having been fixated on the US election and the preferred market outcome of an Obama victory, the initial morning feel good bounce [has fizzled out], as markets quickly moved on to the next potential banana skin," said Michael Hewson at CMC Markets.

"In this case there are several, starting with today's Greek parliamentary vote on austerity, not to mention concerns about how the newly elected president will deal with the US fiscal cliff concerns."

Under current plans, $600bn (£375bn) of tax rises and spending cuts will kick in in January, with many analysts saying this will push the US economy back into recession.

Weak demand

In the spring, the Commission forecast that the 27 members of the EU would collectively produce no economic growth in 2012. It now forecasts the EU economy will shrink by 0.3%. It also downgraded its forecast for the eurozone economy this year, from a contraction of 0.3% to 0.4%.

The revisions to next year's forecasts were more stark. While the eurozone is barely expected to grow at all, the EU is now forecast to grow by 0.4% compared with the previous estimate of 1.3%.

The Commission made a number of drastic cuts in its forecasts for growth for 2013, and none more so than Greece, which it now expects to contract by 4.2%, having forecast flat growth in the spring. It expects Greece and Spain to return to growth in 2014.

The UK is now expected to grow by 0.9% next year, and Germany 0.8%, having both been forecast to grow 1.7% previously.

The Commission also said it expects the UK government's budget deficit - the amount by which its annual spending exceeds its income - to grow to 7.2% in 2013 from 6.2% this year, making it the highest in the EU apart from the Republic of Ireland.

Unemployment in the eurozone currently stands at 11.6%, and the Commission said it would peak at 12% next year. Domestic demand, it said, would remain weak next year before picking up in 2014.

"Major policy decisions have laid the foundation for strengthening confidence," said the Commission's vice-president for Economic and Monetary Affairs, Olli Rehn.

"Market stress has been reduced, but there is no room for complacency."

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