The European Central Bank (ECB) has cut its projections for growth of the euro-zone economy both this year and next year.
It forecast growth of just 0.6 to 1.0 per cent in the single currency area in 2002, and growth of 1.1 to 2.1 per cent in 2003, the bank said in a report published this morning.
Previously, the ECB had been predicting growth of 0.9 to 1.5 per cent for this year and growth of 2.1 to 3.1 per cent for next year.
The ECB said high levels of uncertainty still threaten the outlook while weak demand is keeping inflation in check.
"The evidence has increased that inflationary pressures are easing, owing in particular to the sluggish economic expansion. Furthermore, the downside risks to economic growth have not vanished," the bank said in its December monthly bulletin.
The bulletin's policy statement closely echoed the words of President Wim Duisenberg at the bank's news conference last Thursday when the central bank lowered its benchmark interest rate by half a percentage point to 2.75 per cent.
Given little new to chew on over the future direction of rates in the report, financial markets were little changed, sticking with their expectation that the central bank will keep interest rates on hold for now.
"If this outlook comes true, I wouldn't expect rates to drop further. The message is the recovery is on its way," Mr Michael Schubert, an economist at Commerzbank.
"Growth forecasts have been reduced massively but the inflation outlook hasn't and that's also a reason why the ECB will at least take a very close look before a next rate cut."
Mr Schubert said the ECB's projections were largely in line with consensus forecasts by economists.
The disappointing euro zone growth outlook was due to persistently high uncertainty, the ECB said. Prospects for a war in Iraq and the impact that could have on oil prices cast a cloud over the region's economy.
While growth in the single currency bloc's economy would get closer to its 2.0 per cent to 2.5 per cent cruising speed next year, coming months were likely to remain anaemic.
The ECB publishes macro-economic projections twice a year, in June and December.