The European Central Bank (ECB) looks set to cut interest rates tomorrow following a deluge of negative information yesterday on the European economy.
German unemployment rose along with fears that its deficit could rise close to Maastricht limits.
At the same time it emerged that the services sector across the EU registered the second month of shrinkage in a row in October while economic sentiment hit its lowest level since 1997.
Meanwhile, the European Commission is preparing to reduce its predictions for growth this year and next, to 1.7 and 1.8 per cent respectively, when it publishes official revisions of growth scenarios later this month. It was predicting growth of 2.8 per cent for this year last April.
The IMF also cut its growth forecast for the economy to 1.6 per cent in 2001 and 1.5 per cent in 2002, down from 1.8 per cent and 2.2 per cent respectively.
German finance minister Mr Hans Eichel said the EU Commission now estimates that Germany will have a public deficit of 2.5 per cent of output this year and 2.6 per cent in 2002, a far higher figure than planned. ECB president Mr Wim Duisenberg, gave a clear signal that the bank was poised to cut rates when its governing council meets in Frankfurt tomorrow following an early preview of euro-zone inflation data showing an easing in October.
"Our most recent assessment is that inflation is falling to levels well below the 2 per cent limit," Mr Duisenberg said on leaving the meeting of euro-zone finance ministers. Asked when, he said: "It will be early next year but then it will be well below and then it will stay there."
Analysts noted that Mr Duisenberg normally avoids any comment when leaving such meetings. Most are convinced that the latest data makes the case for further rate cuts almost invincible and most now expect a quarter of a percentage point cut, to 3.5 per cent tomorrow. However, many see a case for a bigger cut.
The IMF executive board report said that "under a cumulation of adverse supply and demand shocks, the European upswing came to a virtual standstill in the second three months of 2001".
It added that the European economies will feel the effects of the global downturn this year and next. "In the face of large and global disturbances... and the marked slowdown in world-trade growth, the euro zone's expansion has proven less resilient than anticipated."
Official French data released yesterday showed consumer confidence was weak but stabilising. A survey of French manufacturers showed deepening gloom over export prospects.
Unemployment increased for the fourth consecutive month in France, rising to 9.1 per cent from 9 per cent in August. In Germany it remained at 9 per cent.
--(Additional reporting Reuters)
