Persistent financial turmoil, the fallout from a deepening US downturn, and resurgent oil prices are set to inflict a more severe slowdown on the eurozone economy than previously expected, Brussels said yesterday.

Growth in the 15-nation bloc of countries in the euro is set rapidly to lose steam after a buoyant 2007, dropping to only 1.8 per cent this year, the European Commission said in its latest forecasts of the outlook.

The Commission acknowledged the danger of an even more drastic downturn in Europe. However, economists cautioned that despite the move by Brussels to cuts its forecast from a previous projection of 2.2 per cent growth, its view remained too rosy. Independent analysts expect eurozone growth to drop to 1.6 per cent of less this year.

Yesterday’s Commission assessment also raised a renewed question mark over how fast and far the European Central Bank is likely to be able to respond to a deteriorating eurozone outlook with lower interest rates.

The Brussels forecasts sounded a warning that despite the looming slowdown, weaker growth will be coupled with stronger inflation at the worst levels since the euro was launched in 1999, thanks to the surging world cost of fuel and food.

Echoing Wednesday’s US Federal Reserve prediction that the United States economy faces a malign combination of sharply weaker growth with persistent price pressures, the Commission forecast that eurozone inflation will remain stuck at 2.6 per cent for this year as a whole - up from 2.1 per cent last year and far above the ECB’s target of “close to, but under 2 per cent”. In November, Brussels forecast 2.5 per cent annual eurozone inflation over 2008.

The inflation threat confronting the eurozone was emphasised still further yesterday as official figures showed that French inflation leapt to a 15-year high of 2.8 per cent last month, driving by the cost of food and energy.

But Joaquin Almunia, the EU’s Economic Affairs Commissioner, insisted that the eurozone did not face a bout of Seventies-style “stagflation” - with stagnating growth at the same time as high inflation.

“We are not in a stagflation situation,” he said. “We are living in an environment of less growth and more inflation, but there is still growth, and the inflationary pressure can be tackled and can be reduced.

Mr Almunia conceded that he was more pessimistic now than in November, over both growth and inflation, thanks to the host of threats to European prospects that had materialized.

“The financial turmoil is taking longer than we expected, the US slowdown is more evident than we expected, and the evolution of confidence levels has worsened,” he said.

He added that while risks over inflation had diminished somewhat, the threat remained that price pressures would end up being stronger, rather than weaker, than in the forecasts the Commission released yesterday.

The commissioner also rejected suggestions that eurozone governments should mimic the US in implementing fiscal measures through tax cuts or increased state spending to underpin growth.

“I don’t see the need of added fiscal impulse,” he told reporters.

In its detailed forecasts, the Commission projected that Germany's economy will grow by 1.6 per cent this year, France's by 1.7 per cent, and Italy's by just 0.7 per cent. The 27-member EU as a whole is tipped to see growth of 2 per cent, with Britain's economy expected to expand by 1.7 per cent - down from the 2.2 per cent that Brussels predicted in November.

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