The European economy will slow for a third year in 2009 as faster inflation weighs on consumer spending and discourages the European Central Bank from cutting interest rates, the European Commission said.
Economic growth in the euro region will slow to 1.5 per cent next year, the commission said today in its spring economic forecast, 0.6 percentage point less than it projected in November and below the 1.7 per cent expansion expected for 2008.
Inflation will jump to 3.2 per cent this year, 0.6 per cent more than the commission's February forecast, before easing to 2.2 per cent in 2009.
"I'm surprised they felt the need to bring it down so far," Jonathan Loynes, chief European economist at Capital Economics in London said. "It's very early days, there are an awful lot of uncertainties."
Record oil prices, declines in the pound and the dollar, and a global credit shortage are buffeting the European economy as the U.S. teeters on the brink of a recession.
The fastest inflation since 1992 is preventing the ECB from cutting interest rates to support economic growth.
"These things will have an impact on the economy over a long period of time,'' said Stephane Deo, chief European economist at UBS AG in London.
"The growth rate will be not catastrophic, but weak."
The euro extended its gains against the dollar following the release of the report, rising as much as 0.53 per cent. It traded up 0.4 per cent at $1.5664 at 2:10pm.