The European Commission said today euro zone is emerging from recession, although it kept a gloomy forecast for 2009.
In its interim forecast, the European Union's executive said the economy of the 16 countries using the euro would contract by 4.0 per cent this year - the same as it forecast in May.
"The growth momentum ... has therefore been revised up for the second half of this year. However, the outcome at the turn of the year proved so weak that, despite the new outlook and the better-than-expected outcome for the second quarter, the fall in GDP remains unchanged," the Commission said.
"The EU economy appears to be at a turning point," it said.
EU Monetary Affairs Commissioner Joaquin Almunia said the improved outlook results mainly from "unprecedented amounts of money pumped into the economy by central banks and public authorities".
The fiscal stimulus should be kept in 2009 and 2010, but the euro zone and the EU should map out an exit strategy, with budget deficits across the region expected to be higher than previously thought, he said in a written statement.
Euro zone inflation in 2009 will be 0.4 per cent, the Commission said, keeping its May forecast. Price growth will still, however, stay well below the European Central Bank's target of below, but close to, 2 per cent.
The Commission said that while inflation risks were broadly balanced, the risk of deflation has diminished because of a rise in commodity prices.
The ECB also forecast earlier this month a smaller contraction for the euro zone and higher inflation after its two biggest economies - Germany and France - staged a surprise exit from recession in the second quarter.
Growth outlook carries significant risks, mainly from mounting unemployment and weak credit.
"Looking into next year, however, uncertainty is rife. There are reasons to believe that the recovery could prove volatile and sub par," the Commission said.
The interim forecasts are for the biggest economies in the 27-nation EU - Germany, France, Italy, Spain, the Netherlands, Britain and Poland, which together account for 80 per cent of its gross domestic product.
The Commission said the German economy, the biggest in the euro zone, would contract by 5.1 per cent this year, a better figure than the 5.4 per cent forecast in May. Germany's 2009 inflation is seen at 0.3 per cent.
In France, the second biggest euro zone economy, growth should be -2.1 per cent, compared with -3.0 per cent predicted in May, it said.
Poland, which is not part of the euro zone, would be one of few European countries to see its economy grow in 2009, the Commission said. It improved its 2009 growth outlook to 1.0 per cent from -1.4 per cent.
The Commission said the economies of Spain, Italy, Britain and the Netherlands would contract more than previously thought.
The EU executive said the euro zone's economy would grow by 0.2 per cent and 0.1 per cent in the third and fourth quarter respectively, compared with the previous three months.
In the first and second quarter, the economy contracted by 2.4 and 0.2 per cent respectively.
However, figures also released today showed euro zone industrial output fell in July and employment dropped again in the second quarter, pointing to continued weakness in the economy.
Industrial output in region fell 0.3 per cent month-on-month in July for a 15.9 per cent year-on-year fall, the European Union's statistics office Eurostat said today.
Economists polled by Reuters had expected a 0.2 per cent monthly decline and a 16.6 per cent annual drop.
The year-on-year numbers, however, showed clearly the contractions in output are becoming smaller. In June, production was 16.7 per cent lower than a year earlier and in May it was 17.6 per cent, better than the 21.3 per cent in April.
Eurostat also said employment in the euro zone fell 0.5 per cent in the second quarter against the previous three months, and was 1.8 per cent lower than the year before.
This points to continued weakness of the labour market, as companies scale down production capacity because of weak demand.
Employment is likely to feel the effects of the nascent recovery last, economists say, but more people without jobs mean less demand in the economy and therefore a slower recovery.
Eurostat estimated that in the second quarter of 2009, 145.6 million people were employed in the euro area, 702,000 people fewer than in the previous three months.
Eurostat said there were job cuts in all sectors of the economy recorded except for public administration, health and education, where employment grew 0.5 per cent in the euro zone.
The job cuts were in manufacturing, construction, financial services and business activities, agriculture and trade, transport and communication services.
Reuters