"The outlook for the European economy has deteriorated. Recoveries from financial crises are often slow and bumpy," Economic and Monetary Affairs Commissioner Olli Rehn said.
"The EU economy is affected by a more difficult external environment, while domestic demand remains subdued. The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy."
The commission, which issues economic forecasts twice a year, predicted gross domestic product in the 17-nation euro zone would expand just 0.1 percent from the previous quarter in the October-December period, slowing from an estimated 0.2 percent in the current quarter and the same rate last quarter.
For the 27-nation European Union, it forecast growth of 0.2 percent in the third and fourth quarters of this year, the same rate as in the second quarter.
SLOWDOWN
Although the commission expects the euro zone to continue expanding through the end of this year, private analysts are not so sure. A Reuters poll of 70 analysts, published on Wednesday, showed a 30 percent chance that the zone will slip back into recession over the next 12 months.
World Bank President Robert Zoellick said on Wednesday that the world had entered a new economic danger zone and Europe, Japan and the United States all needed to make hard decisions to avoid dragging down the global economy.
"Unless Europe, Japan, and the United States can also face up to responsibilities, they will drag down not only themselves, but the global economy," he said.
Rehn said that to get the euro zone's economic recovery back on track, it was crucial to maintain financial stability and reform deficit-ridden state budgets to make them sustainable.
However, countries including Greece, Portugal and Italy have not convinced financial markets that they can cut budget deficits while achieving healthy levels of economic growth.
The commission kept its forecast for growth in the euro zone during 2011 at 1.6 percent, unchanged from its last prediction in May and down only slightly from 1.8 percent expansion in 2010. But this was because first-half growth was stronger than expected; the second half is likely to be weaker than anticipated.
The full-year forecast for Germany, the euro zone's biggest economy, was raised to 2.9 percent from 2.6 percent. But this was offset by cuts in forecasts for France, Italy and the Netherlands.
France is now expected to grow 1.6 percent this year instead of 1.8 percent, while the forecast for Italy was lowered to 0.7 percent from 1.0 percent. Italy's economy is not expected to grow at all in the third or fourth quarters of 2011, the commission said.
INFLATION
Euro zone inflation, which the European Central Bank wants to keep below but close to 2 percent, will fall but remain above 2 percent through the end of the year on a quarterly basis, the commission predicted.
It forecast inflation of 2.5 percent this quarter and 2.2 percent next quarter, after 2.8 percent last quarter. Inflation for all of 2011 is projected at 2.5 percent, compared to the ECB's forecast of 2.5-2.7 percent.
Consumer prices rose 2.5 percent from a year earlier in August, the same rate as in July. Prices were boosted by energy costs, which soared 11.8 percent from a year earlier. Without energy, unprocessed food, alcohol and tobacco costs, prices climbed only 1.2 percent.
Copyright Reuters, 2011