The euro zone's economy will shrink by 4% in 2009, the European Commission said today.
But it said a forecast third-quarter exit from recession would be weighed down by rising unemployment and strained government finances.
'The situation has improved - mainly due to the unprecedented amounts of money pumped into the economy by central banks and public authorities - but the weak economy will continue to take its toll on jobs and public finances,' Economic and Monetary Affairs Commissioner Joaquin Almunia said.
The commission's bi-annual interim forecast said inflation in 2009 would also remain unchanged at 0.9% across the 27 EU countries and 0.4% throughout the euro nations. But EU economists warned that with energy and food prices having reversed their slide, and commodity prices also moving upwards, 'the inflation rate is set to increase towards the end of the year'.
Despite a sharp upturn in the world economic picture - with the projected global fall in GDP halved from 1.4% in May's forecast to 0.7% - the EU said uncertainty 'remains rife'.
It added: 'The full impact of the crisis on labour markets and public finance is still to come, and the correction in housing markets continues to hold back construction investment in several countries.'
Growth in the third quarter compared to the second three months of 2009 is predicted to be 0.2% in the euro zone, falling back to 0.1% over the following three-month period.
Separate figures from EU data agency Eurostat showed that industrial production in the euro zone fell by 0.3% in July and by 15.9% over 12 months.
The figures, which were adjusted for seasonal variations, marked a slight slowdown from June when industrial production decreased by 0.2%.
A breakdown showed that the overall fall in July came despite a 0.7% increase in production of non-durable consumer goods. That rise was more than matched by a 0.8% fall in durable consumer goods like fridges and televisions. There were also drops of 1.2% in energy production, not unusual in July, and a 1.8% drop in capital goods.
