Economic growth in the euro zone is set to fall to a year-on-year rate of 1.4 per cent in the third quarter of this year, lower than forecast one month ago, according to the latest growth indicator produced for the Financial Times, FT Deutschland and Les Echos.

The indicator, compiled by a consortium of leading European research institutes, suggests that year-on-year growth was 2.6 per cent in the first quarter and 2 per cent in the second. One month ago, the indicator predicted third-quarter growth of 1.6 per cent.

But the consortium said the weakening of foreign demand, especially in the US, was beginning to wipe out the competitive benefits of the euro's low value on world currency markets.

"The average growth rate for this year will obviously stay under 2 per cent for the euro area, if there is no turnaround in expectations. This would be well below most forecasts made in the spring," the consortium said.

"The effect of the weak euro on growth quite certainly peaked in the second quarter and will be significantly lower in the coming quarters, even if the currency remains weak," it added.

The International Monetary Fund recently estimated the euro zone would achieve growth of about 2 per cent this year, down from 3.4 per cent in 2000.

The European Central Bank said growth this year should be close to the area's long-term average rate of 2 to 2.5 per cent.

The consortium said the positive impact of industrial output on euro-zone economic growth disappeared in the second quarter and would turn negative in the third. "The boost from relatively large tax cuts in most euro area countries, notably Germany, have so far at most prevented a more drastic decline in European confidence on the part of both consumers and retail traders," it said.

But the consortium said the recent decline in world oil prices was helping the euro zone. In addition, the restricting effect of the ECB's monetary policy was slowly diminishing as interest rates have started to come down.

The ECB cut its main rate by 0.25 percentage points in May to 4.5 per cent. Financial markets believe another cut is likely at the end of August or in September.

Car sales in western Europe declined 1.4 per cent in the first seven months of this year, but have held up better than expected in several markets, according to data from JD Power-LMC. The economic research group said the annualised selling rate for new cars was close to 15 million units in July.