The euro zone should escape a recession but growth is expected to fall significantly, the International Monetary Fund said in a report published today.

'Growth will likely slow substantially this year before reaccelerating' next year, the report from the IMF's executive board said.

The central scenario underlying IMF, EU and European Central Bank projections 'is for a significant slowdown, but no recession or prolonged period of sluggish activity,' as seen in 2002-2005 the report said.

The IMF predicted 1.7% growth in the 15-nation euro zone this year and 1.2% in 2009. Those figures include a deceleration in the course of 2008 and a re-acceleration toward trend during 2009,' it added.

Last year euro zone growth was recorded at 2.6%.

Euro zone inflation, at record peaks due to high energy and food prices, 'should fall appreciably from its current levels, although risks are high.'

Euro zone inflation nudged higher in July to a record 4.1%, according to a first official EU estimate last week. The IMF here too sees a return to norms next year moving 'to below 2% some time in 2009,' bringing it back in line with ECB targets.

The IMF admitted that the ECB itself and the EU find this target 'slightly optimistic.' The Fund bases its predictions on energy and food prices stabilising next year.

However an inflationary spiral, fuelled by high wage increases as consumers feel the pinch, remains a threat and therefore proactive measures are required, the IMF said in its report.