Hopes of an imminent European economic recovery receded yesterday after the European Commission significantly revised downwards its economic forecasts for the euro zone.

Having forecast three months ago that the euro zone economy would grow by 0.1 per cent this year, the commission now expects the economy of the 17-member bloc to contract by 0.3 per cent, with some of the bloc’s biggest players, including France and Spain, unlikely to meet their fiscal targets.

Economic activity had been “disappointing” in the second half of 2012, EU commissioner Olli Rehn said yesterday, noting that the improvement in the financial markets and progress such as the ECB’s bond-buying pledge were “not yet feeding through to the real economy”.

Rebalancing process

“The rebalancing process has been and will continue to weigh on growth and public finances for some time to come, especially in highly indebted countries,” he said.

However, Mr Rehn defended Europe’s economic policies. “We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is under way, delaying the needed upswing in growth and job creation.”

The forecast also suggested that unemployment will continue to rise this year, peaking at 12.2 per cent across the euro zone.

This compares to a previous estimate of 11.8 per cent, and an unemployment rate of 11.4 per cent in 2012.

Ireland was one of the best performers according to the outlook, with Mr Rehn noting it had outperformed most other euro zone economies.

GDP growth for 2012 was revised upwards to 0.7 per cent from 0.4 per cent, with the report noting that an “upside risk to domestic demand” could offset downside risks to Ireland’s trading partners’ demand.

The commission warned that the expiration of pharmaceutical patents as well as dampened international demand could weigh on Ireland’s exports.