The European Commission has cut its 2008 euro zone growth estimate to 1.3% from 1.7% previously. It forecast that the area would just barely escape a recession this year.
Hit by high energy prices, weak global economic activity and financial market turmoil, the euro zone is headed for a sharp slowdown from the solid 2.6% growth it saw last year.
After the euro zone economy shrank by 0.2% in the second quarter, the commission predicted it would stall in the third quarter and expand by only 0.1% in the final three months.
If the forecast bears out, it would mean that the euro zone will be spared a recession, which economists define as two consecutive quarters of contracting economic activity.
But the commission did forecast a recession this year in Germany, as well as Spain and Britain, which is not a member of the euro zone.
'The continuation of the turmoil in the financial markets one year on, the near doubling of energy prices over the same period and the correction in some housing markets have had an impact on the economy,' EU Economics Commissioner Joaquin Almunia said. But he added that a recent fall in oil and other commodity prices and the easing up in the euro exchange rate had 'provided some relief'.
Meanwhile, ECB president Jean-Claude Trichet has warned that inflation in the euro zone is likely to remain high despite a pull-back from a record 4% in July.
Trichet told the European Parliament's economic and monetary affairs committee inflation was likely to ease 'only gradually' during 2009.
The annual inflation rate in the euro zone fell in August to 3.8% after hitting the highest rate in the area's history in July on the back of record oil prices. Oil prices have fallen steadily since.
Trichet said that the movement of oil and food prices in the months ahead would be central to how well the euro zone economy coped with sharply slowing activity.
The ECB is currently forecasting euro zone growth this year of 1.1-1.7% in 2008 and 0.6-1.8% in 2009. But Trichet said uncertainty about growth prospects was 'particularly high'.
