The European Central Bank (ECB) has revised down its eurozone growth forecasts for 2012 and 2013 as “economic weakness extends into 2013”.
ECB President Mario Draghi said the bank expected the bloc’s economy to shrink by about 0.5% this year, before recovering later in 2013.
He said weak consumer and investor sentiment was weighing on growth.
Earlier, the ECB held the benchmark eurozone interest rate at the record low of 0.75%, as had been expected.
Mario Draghi said rates had been left unchanged due to higher energy prices, rising taxes and the fact inflation fell from 2.5% to 2.2% last month.
Interest rates are the main tool used by central banks to influence demand and therefore prices in the economy.
Mario Draghi said the bank expected inflation to fall below 2% next year. The target rate is below but close to 2%.
Interest rates have been at 0.75% for five months, after July’s cut from 1%.
The ECB revised down is forecast for the eurozone economic growth in 2013 to between minus 0.9% and plus 0.4%.
For 2014, it forecast growth of between 0.2% and 2.2%.
Mario Draghi said “persistent uncertainty” was weighing on economic activity.
He said the bank continued to see “downside risks”, in particular “uncertainties about the resolution of sovereign debt issues in the euro area, geopolitical issues and fiscal policy decisions in the United States”.
He was referring to the so-called fiscal cliff of automatic spending cuts and tax rises which kick in the new year and which will push the US economy back into recession. US policymakers are trying to agree a way to avoid the cliff.
However, Mario Draghi said a “strengthening global demand and a significant improvement in financial market confidence” would help fuel a recovery later in 2013.
The eurozone is back in recession as austerity measures designed to reduce debt levels continue to undermine demand and confidence.
The economy of the 17-member bloc contracted by 0.1% between July and September, after shrinking 0.2% in the previous three months.
Meanwhile, the unemployment rate is at a record high of 11.7%.
The eurozone was last in recession in 2009, when the economy contracted for five consecutive quarters.