Euro Zone Growth Forecasts Cut Sharply

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Economists have sharply cut expectations for euro zone economic growth this year, now seeing a 0.4 percent contraction compared with a 0.1 percent decline predicted just three months ago, a Reuters poll showed on Thursday.

The survey of more than 60 economists also predicted the euro zone's unemployment rate, already at record highs, has further to rise and will likely peak towards the end of this year and early 2014.

Most analysts surveyed over the last week expect the euro zone will manage to escape recession this quarter - albeit barely - while growth will average just above the zero line for the next year at least.

Still, the euro zone economy looks on course to end the year smaller, according to the median -0.4 percent forecast. That's in stark contrast to growth in the United States, which is expected to average 2.0 percent this year.

Worse for the euro zone is that what growth it has is being help up by Germany, which is expected to pick up modestly. The other big economies - France and Italy -are in a slump.

Nineteen out of 25 economists who answered an extra question said they expect the European Central Bank will announce more measures to tackle the downturn.

"The lack of growth and record unemployment, combined with deeper spending cuts and a credit crunch as peripheral banks deleverage, present a real risk to the euro zone's future," said Lena Komileva, chief economist at G Economics in London.

The poll showed the jobless rate hitting 12.4 percent by the end of this year,compared with 12 percent in February. The most popular suggestions for further ECBaction were for a program to boost lending to small and medium-sized businesses, and a new round of cheap three-year loans to banks.

The German Core

Only four out of 37 economists expect the euro zone's recessionwill persist through the current quarter, which is perhaps surprising given how business survey shave shown little sign of improvement recently.

But that consensus depends on there being no severe flare up in the sovereign debt crisis, which has already stripped five euro zone countries of their ability to fund themselves.

The fact the euro zone might make it out of recession is purely a reflection of Germany's relative strength than a sign the bloc as a whole is returning to prosperity.

For the full year, Europe's largest economy and paymaster, long resilient to the euro zone crisis, is expected to post moderate growth of 0.6 percent because private consumption remains cautious and imports outpace exports.

"The first quarter was weighed down by the weather and is a bit shaky but the development of income and the revival of the world economy, should help the German economy grow," said Andreas Scheuerle at Dekabank.

The German economy will grow faster next year, at 1.7 percent, the poll suggested,based on wage hikes and lower unemployment fueling private consumption.

The consensus forecasts for 2013 and 2014 growth were unchanged from the previous poll carried out in January.

The story is completely different for France, which will miss the government's recently downgraded growth estimates, putting deficit-cutting goals at risk again after an initial 2013 target was abandoned.

And the recession taking hold of the euro zone's No.3 economy, Italy, will likely be deeper than previously expected and its debt will rise to a new all time high.

The poll's findings make grim reading as Italy's political stalemate continues in the wake of February's inconclusive election which left no coalition able to form a government.

A consensus of more than 20 economists polled projects a 1.5 percent contraction in the euro zone's third largest economy this year following the official 2.4 percent decline in 2012.

The public debt, which hit a record high of 127 percent of output in 2012, if forecast to climb to 129.8 percent this year.

"It's a bleak outlook, we don't see any growth in any quarter this year or next, and the absence of a government will not help," said Giada Giani, euro zone economist at Citigroup.