The European Commission has trimmed its 2007 economic forecast for the euro zone to 2.5% owing largely to a sharply lower outlook for France.
Although economic activity remained solid in Europe, recent turbulence on financial markets prompted the European Union's executive arm to lower its euro zone growth outlook from its previous estimate of 2.6%.
The economy of the combined 27-nation economy was expected to grow 2.8% this year rather than the 2.9% forecast in May, when the Commission last updated its estimates.
Although the economy would withstand the roller-coaster volatility on financial markets, the Commission warned that 'the recent distress has clearly tilted the balance of risks to the downside.'
But overall domestic demand in Europe was expected to remain strong thanks to consumers becoming more confident about spending with unemployment falling to levels not seen in Europe since the early 1980s.
But the Commission said recent indicators of future economic activity, such as business surveys, were suggesting that growth had past its peak after a steady recovery in recent years driven by a gradual turnaround in Germany.
But while the Commission lowered only slightly its German growth estimate to 2.4% from 2.5% in May, it painted a darker outlook for France, the second biggest euro zone economy.
Although French President Nicolas Sarkozy has vowed to jolt France into faster growth with a raft of measures, the EU executive forecast that the French economy would grow only 1.9% this year, down from a May estimate of 2.4%.
The Commission said it expected sharply lower French growth because of an unexpected stagnation in business investment, likely to worsen due to the chaos on financial markets.
On the inflation front, the Commission predicted slightly faster consumer price growth due mainly to rising commodity prices, lifting its inflation forecast for this year to 2% from 1.9%.
