The euro zone will not return to growth until next year, the European Commission said yesterday, reversing its prediction for an end to recession this year and blaming a lack of bank lending and record joblessness for delaying the recovery.
The 17-nation bloc's economy, which generates nearly a fifth of global output, will shrink 0.3 per cent this year, the commission said, meaning the euro zone will remain in its second recession since 2009 for a year longer than originally expected.
The commission, the European Union's executive body, late last year forecast 0.1 per cent growth for last year, but now says tight lending conditions for companies and households, job cuts and frozen investment have delayed an expected recovery.
The commission forecasts the euro zone will grow 1.4 per cent next year, and said it shrunk 0.6 per cent last year.
"The improved financial market situation contrasts with the absence of credit growth and the weakness of the near-term outlook for economic activity," said Marco Buti, the commission's director-general for economic and monetary affairs. "The labour market... is a serious concern."
The European Central Bank's promise last year to do what it takes to defend its common currency has removed the risk of a break-up of the euro zone, and member countries' borrowing costs have come down from unsustainable levels.
But the damage from the global financial crisis and the ensuing euro-zone debt crisis has been greater than expected on the real economy, with global demand for euro-zone exports one of the few saviours in terms of generating growth.
Joblessness in the euro zone is set to peak at 12.2 per cent, or more than 19 million people, the commission said, and both private and public consumption will not make any contribution to improving output, instead dragging on the economy.
The outlook raises the prospect of further interest rate cuts by the ECB to jump-start the economy by reducing the cost of lending for companies and families, although with banks reluctant to lend, any impact may be muted.
Consumer inflation is forecast to be 1.8 per cent this year, and with such pressures contained the ECB may feel more comfortable cutting rates to below the current 0.75 per cent level.
The commission's overall view is a touch more pessimistic than that of the IMF, which expects a 0.2 per cent euro-zone contraction.