The European Commission today warned that economic growth in the eurozone was much weaker than forecast and was not expected to return to potential before 2004. "Recent indicators suggest that activity, which began to decelerate in the fourth quarter of last year, will remain sluggish during the first half of 2003," the Commission said in its latest quarter report on the eurozone. "Growth may start to recover during the second half of 2003, but is only expected to return to potential in 2004," it added. The Commission said the European Central Bank's interest rate cuts over the last three months had "provided some necessary oxygen".
It added, "In the event of a conflict in Iraq, monetary policy could be used to respond to a possible collapse in coinfidence." However, it said the role of monetary policy could be complicated by a surge in oil prices. "Nevertheless, core inflation is currently on a downward trend and, contrary to previous oil shocks, which hit the European economy at times of large positive output gaps, the excess capacity currently prevailing would leave monetary authorities some room for manoeuvre," it said. //www.fxcentre.com