Euro zone economy seen contracting for a year

By Nigel Davies

LONDON (Reuters) - The euro zone economy is forecast to shrink for around a year before interest rate cuts and government spending plans begin to pull it out of recession late next year, a Reuters poll showed.

The economy began to contract in the second quarter of this year and economists do not see it growing again until the third quarter of next year, and then only marginally.

That would make four consecutive quarters of contraction, well past the mere two needed to define a technical recession and the first recession the euro zone has seen.

A monthly survey of 85 economists covering interest rates, growth and inflation, showed forecasts for growth revised down for this year to just 1.0 percent from 1.1 percent last month after an ugly October tore into markets and the outlook soured for growth.

Next year looks rough too, although a deep recession for now is not seen likely. GDP is forecast to contract 0.4 percent, still massively down on the 0.4 percent growth predicted last month.

With inflation coming sharply down the European Central Bank has all the justification it needs to cut interest rates even further from the current 3.25 percent where they currently stand.

Economists see another 50 basis point cut coming in December after two of the same sized moves made in October and November. Potential tax cuts across many euro zone countries could also ease the burden on the economy.

"Fiscal and monetary stimulus will take time to come through, so we're going to see a pretty tough time for several quarters. The global economy is going through its worse downturn since the 1930s and this will hurt the euro zone," said Ben May at Capital Economics.

Yet he said the euro zone was unlikely to see a prolonged and painful recession given its strong fundamentals. That contrasted with forecasts for the UK that is forecast to contract by 1.3 percent next year.

Growth next year in the 15-nation bloc is seen contracting 0.2 percent in the first quarter. From there growth is seen stagnant at zero in the second quarter, rising slightly to 0.1 and 0.2 percent in the final two quarters of the year.

Economists are pretty unanimous that recession in the euro zone will not blow over too quickly. Twenty-seven of 44 economists said it would last 6-12 months, while 14 said it would take one to two years. Just three said it would be all over in six months.

Just how bad it gets may be open to some debate, however. Economic survey data were badly hit in October when markets were savaged by a new bout of the credit crisis. Even falling oil prices and a weaker euro do not seem yet to have aided a gloomy outlook for growth.

Forecasts for growth next year range from 0.8 percent to -1.9 percent.

RATE SLASH

The response from the ECB will be to cut rates even further after already slashing 100 basis points in the last two months.