Growth in the euro zone is slowing down, but will not result in a double-dip recession, the European Commission said today.

The European Union cut its quarterly growth forecasts for the second half to reflect a worsening outlook from the debt crisis and warned the euro-area economy may come "close to standstill at year-end."

The 17-country euro region will expand 0.2 per cent in the third quarter and 0.1 per cent in the fourth, down from an estimate in March for 0.4 per cent expansion in both periods, the European Commission said.

Exports, which were the main driver of growth in the second quarter, are set to become less dynamic, while deteriorating business and consumer survey data indicates a weakening of domestic demand in the second half of the year and possibly beyond the horizon of the interim forecast.

Inflation, which accelerated in the first half of the year, driven mostly by the energy costs, is now expected to moderate faster than envisaged in spring, due in part to lower commodity prices.

With weaker economic growth going forward,  inflation in the EU and the euro area is expected to ease gradually, reaching 2.9 per cent and 2.5 per cent respectively for the year as a whole, and remaining above 2 per cent until the end of 2011.

EU economic and monetary affairs commissioner Olli Rehn said that the outlook for the European economy has deteriorated.

"The outlook for the European economy has deteriorated," Mr Rehn said in a statement. "The sovereign-debt crisis has worsened, and the financial market turmoil is set to dampen the real economy."

Mr Rehn said Ireland's growth prospects are "broadly in line" with expectations.

The growth outlook for Germany, Europe's biggest economy, was lowered to 0.4 per cent for the third quarter and 0.2 per cent for the fourth, down from 0.5 per cent for each quarter earlier. It forecast no growth for Italy in the second half.

G7 finance chiefs vowed on September 9th to make a "concerted effort" to support growth as efforts to rein in budget deficits curtail demand and increasing concerns about Greece's ability to avoid a default roil financial markets.

Exports from Germany, the region's largest economy, declined in July while investors and executives grew more pessimistic last month as the sovereign-debt crisis threatened to engulf Spain and Italy.

The euro was off its highs against the dollar after the data, trading at $1.3767 at 10:01 a.m. in London, up 0.1 per cent on the day after reaching $1.3790 earlier.

"The recovery lost steam in the U.S., and indicators for world trade suggest a further weakening into the third quarter," the commission said in the report. "Global output is now projected to grow by some 4 per cent in 2011, a downward revision of about a half a percentage point compared to the
spring forecast."

The commission forecast the euro region will expand 1.6 per cent this year, the same as it predicted in May. It raised its forecast for annual German growth to 2.9 per cent from 2.6 per cent. It forecasts 2.5 per cent euro-area inflation this year, compared with a prediction of 2.6 per cent in May.

The commission cut its 2011 forecast for Italy while maintaining its prediction for Spain, whose bond yields surged to euro-era highs in August, prompting the
European Central Bank to intervene to prop up the two countries' bond markets.

Italy will expand 0.7 per cent compared with an earlier prediction of 1 per cent, and Spain will expand 0.8 per cent.

Reuters