European economy 'very weak'

ECB boss Wim Duisenberg will step down in a month's time

The 12-nation eurozone is in even worse economic trouble than previously thought.

The warning, from European Central Bank President Wim Duisenberg, comes just a week after the ECB slashed interest rates by half a percentage point to 2% in the face of fears of deflation and renewed recession.

Now, in his quarterly appearance before the European Parliament, Mr Duisenberg has cut back the ECB's forecasts for eurozone growth to 0.4-1.0% in 2003 from the 2% he had previously predicted.

"Economic growth in the first half of 2003 is likely to have been weak, very weak, and expectations for annual average growth of this year and 2004 have had to be scaled down," Mr Duisenberg told a European Parliament committee.

The news increases the likelihood that Europe's interest rate will be cut again.

Fighting deflation

Inflation - the taming of which is at the core of the ECB's brief - is dropping significantly, he said, further fuelling some economists' worries about the risk that prices might start falling, damaging investment and risking even lower growth.

FALLING FORECASTS Inflation: 2003: 1.8-2.2% (was 1.3-2.3%) 2004: 0.7-1.9% (was 1.0-2.2%) Growth: 2003: 0.4-1.0% (was 1.1-2.1%) 2004: 1.1-2.1% (was 1.9-2.9%) Source: European Central Bank

For 2003, price growth is likely to be close to earlier predictions, Mr Duisenberg said.

But 2004 may well show a sharp slowdown in inflation - a contingency which the ECB is keen to avert.

Traditionally, the bank has striven to keep inflation below 2%, unlike the targets at the UK's Bank of England, which shoots for an inflation rate within a single percentage point of 2.5%.

According to the BoE's proponents, that makes sure that keeping a lid on prices does not unduly damage growth and the jobs market - factors outside the ECB's official remit.

'Room to manoeuvre'

But with only a month left before he is meant to step down, Mr Duisenberg's rhetoric has changed.

Underlining a policy shift unveiled in May, which stressed that inflation should be not below but "close to" the 2% target, Mr Duisenberg told the European Parliament's Monetary Affairs Committee that the ECB would work just as hard to avert deflation as it does to avert excessive price rises.

The new posture, he said, "does contain adequate room for manoeuvre to fight deflation just as much as we would fight inflation if the forward-looking figures would indicate that it was open to that".

New evidence of trouble in the eurozone came on Thursday morning with news that industrial output in France fell sharply in April, dropping 0.8%.

Germany's output had been hit even harder, dropping 1% in April according to figures released on Wednesday.