The eurozone economy is likely to grow less than forecast this year, despite an expected pick up in the second half from a sluggish second quarter, the European Commission said on Monday. "The Commission's spring forecast for 1.6 percent growth in the euro area this year may ultimately prove to be a little optimistic," Economic and Monetary Affairs Commissioner Joaquin Almunia wrote in the quarterly report.
The Commission will make new forecasts in October but euro zone finance ministers cut their 2005 growth forecast last week to 1.3 percent from 1.6 percent, blaming record high oil prices which cut consumers' disposable incomes.
Some politicians, including German Economy Minister Wolfgang Clement have called for an interest rate cut from the European Central Bank to help boost the sluggish growth.
Europe's biggest economy may not have grown at all in the second quarter because of negative net exports, Germany's central bank said on Monday. Private sector economists mostly expected growth of 0.2 to 0.3 percent.
More gloom came from the independent Italian think-tank REF which revised down its growth forecast for the eurozone's third biggest economy from a 0.5 percent expansion this year to a 0.2 percent contraction.
But the ECB, which has kept rates at 2.0 percent for more than two years, has said cheaper credit might do more harm than good and that the key to faster growth was in politically difficult structural reforms.
Together with its second quarter growth estimate the German Bundesbank, which is part of the ECB, called for further labour market deregulation and social security reform to tackle high unemployment.
The ECB aims to keep eurozone inflation below but close to 2.0 percent and the June numbers were indecisive as the headline figure inched up 0.1 point to 2.1 percent year-on-year while the core measure, without oil prices, fell 0.2 point to 1.4 percent.
Austria's finance minister Karl-Heinz Grasser backed the ECB on Monday saying calls for lower rates were only distracting attention from the eurozone's real problems - the need for more co-ordination of economic policy between EU members.
The EU's Almunia also called in the report for economic reform and greater integration in the eurozone to boost the competitiveness of some of its members and in this way diminish growth rate differences between the 12 countries.
Almunia said the second quarter growth was "disappointingly slow" because of high oil prices and a weakening in manufacturing, which hit business and consumer confidence.
But the second half of the year should be better because "there are early signs that the soft patch in the global economy is coming to an end and that world trade is growing again."
The economy would also benefit from a weaker euro, which would boost exports as well as low interest rates amid signs that confidence was improving, Almunia said.
"All in all, growth is likely to gradually return to potential during the course of the year," he said.
The Commission expects growth in eurozone was 0.1-0.5 percent in the second quarter against the first quarter's 0.5 percent and would pick up to 0.2-0.6 percent in the third.
Oil prices, which the Commission now sees at an average of $54 per barrel this year and at $59 next year will have a negative impact on growth this year and next but their influence should not be overestimated, the report said.