Portents of Eurozone Recession May Force Ecb to Act

Pressure is growing on the European Central Bank to cut interest rates amid fears that the eurozone economy has ground to a halt and could be heading for recession.

Economists are slashing their forecasts for the performance of the German economy, traditionally regarded as the eurozone's locomotive for growth, while the eurozone business activity index for the service sector released yesterday has fallen through the line dividing expansion from contraction. Manufacturing is already below the critical level.

The Organisation for Economic Cooperation and Development warned that the outlook for the eurozone had worsened for the third month in a row.

"The euro economy has stalled and at worst is now going backwards," according to economists Geoffrey Dicks and Ross Walker at Royal Bank of Scotland Financial Markets. "Pressure is building on the ECB to look through the near-term inflation overshoot and ease policy."

Policymakers at the ECB meet next week and are expected to keep rates on hold this time but to cut the 3.25% benchmark in November or December.

Senior politicians sought to remain upbeat yesterday. French finance minister François Mer insisted that his country could still achieve its target of 2.5% growth next year, while Spain's economy minister Rodrigo Rato claimed that his government's forecast of 3% growth was "realistic".

That was despite a year-on-year 3.9% fall in industrial output in Spain in August and evidence of weakening demand in the service sector in France.