The European Commission has cut its growth forecast for the euro zone to 1.7% for this year, but has also noted 'encouraging signals' for the future.
The EU executive, presenting its spring economic forecasts, lowered its 2004 prediction for gross domestic product growth from the 1.8% it forecast in October. For last year, euro zone GDP is estimated to have expanded by just 0.4%.
Consumer spending had remained disappointing and European exports had been dented by the euro's recent surge against the dollar, the commission said.
But predicting GDP growth next year of 2.3%, it said there were grounds for hope for a turnaround after a three-year slowdown that began with the collapse of the dotcom boom.
The commission expects inflation to dip to 1.8% this year and 1.6% next year, from 2.1% last year. That would be comfortably under the European Central Bank's medium-term ceiling of 2%.
But it says the unemployment rate in the euro zone will remain at 8.8% this year, unchanged from last year, before improving to 8.6% in 2005.
Despite a worsening budgetary picture for the euro zone's biggest economies, the commission forecast the area's average public deficit to be 2.7% of GDP this year, unchanged from 2003. The deficit ceiling laid down in the EU's Stability and Growth Pact is 3% of GDP.
The recovery would be helped by low interest rates and falling inflation, which should 'provide a positive stimulus to consumption', the commission report said.
