Euro zone economy will not grow in 2013
The European Commission has reversed growth outlook from a rise of 0.1% to a decrease of 0.3 per cent.
The euro zone will not return to growth until 2014, the European Commission said today, reversing its prediction for an end to recession this year.
It pointed to a lack of bank lending and record joblessness as the causes of a delayed recovery.
The region's economy, which generates nearly a fifth of global output, will shrink 0.3 per cent in 2013, the Commission said, meaning the euro zone will remain in its second recession since 2009 for a year longer than originally foreseen.
The Commission forecast 0.1 per cent growth late last year but now says tight lending conditions for companies and households, job cuts and frozen investment have delayed an expected recovery.
It expects the euro zone economy to grow 1.4 per cent in 2014, with a figure of -0.6 per cent for 2012.
Commission director-general for economic and monetary affairs Marco Buti said "the improved financial market situation contrasts with the absence of credit growth and the weakness of the near-term outlook for economic activity".
However he added the labour market is a “serious cause for 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.
Joblessness in the euro zone is set to peak at 12.2 per cent, or more than 19 million people, in 2013, the Commission said, and both private and public consumption will not make any contribution to improving output.
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.
The Commission's overall view is a touch more pessimistic than that of the International Monetary Fund, which sees a 0.2 per cent euro zone contraction this year.