By Jan Strupczewski
BRUSSELS, Nov 3 (Reuters) - The euro zone is already in a technical recession and economic growth will come to a virtual standstill next year, the European Commission said on Monday, calling for coordinated action to support growth.
"European Union economies are strongly affected by the financial crisis, which is aggravating housing-market correction in several economies at a time when external demand is fading rapidly," the European Union's executive arm said.
"While the important measures taken to stabilise financial markets have begun to restore confidence, the situation remains precarious and the risks to the forecasts significant," it said in its twice-yearly economic forecasts.
Economic growth in the 15 countries using the euro will slow to 0.1 percent next year from 1.2 percent expected this year, the Commission said. It forecast 0.9 percent growth for 2010.
"We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector," Economic and Monetary Affairs Commissioner Joaquin Almunia said in a statement.
The Commission said it expected GDP to decline in the third quarter of 2008 in both the EU as a whole and the euro area. Since euro zone gross domestic product shrank in the second quarter as well, this would add up to two consecutive quarters of negative growth -- a definition of a technical recession.
"The outlook remains bleak further ahead, with several of the EU economies in or close to a recession," the Commission said.
"A relatively moderate, 50-basis point, further increase in risk premium and a tightening of credit availability for households, not any longer a remote possibility, can trigger an outright recession -- a decline of one percent in GDP in 2009 -- in the euro area," the Commission said.
The Commission expects that the euro zone's three biggest economies, Germany, France and Italy, will not grow at all next year while the economies of Ireland and Spain will contract.
OUTLOOK BETTER THAN FOR U.S.
This is still better than the outlook for the United States, where the economy is set to shrink 0.5 percent next year. The Commission expects Japan to contract 0.4 percent in 2009.
In the whole European Union of 27 member states, Britain's economy will shrink 1 percent next year, the Baltic states of Estonia and Latvia will contract this year, and next and Lithuania will shrink in 2010, the forecasts showed.
Euro zone inflation is likely to slow to 2.2 percent next year from 3.5 percent seen this year and decelerate further to 2.1 percent in 2010, the Commission forecast.
The European Central Bank wants to keep inflation below, but close to 2 percent, but consumer-price growth was boosted by surging oil and food prices in the 12 months to mid-2008.
The bank has signalled it may cut interest rates in November as inflation risks have diminished. The Commission agreed.
"The recent strong decline in commodity prices, together with a marked weakening of the growth outlook and a related easing of the labour-market situation, reduces markedly the risk of second-round effects," the Commission said.
The Commission said that investment, which was a key driving force in the previous upturn, faced a particularly abrupt slowdown, reflecting the impact of weakening demand, a drop in investor confidence, tighter financing conditions for companies, and a lower availability of credit.
Consumption was set to stay subdued even though real disposable income growth was set to rebound as the inflationary impact of higher commodity prices fades.
Net exports, however, would contribute positively to GDP growth because imports would slow more than exports, partly thanks to the recent depreciation of the euro real effective exchange rate, the Commission said.
"Looking at the broader picture, the euro is closer in line with fundamentals at the end of October, as its real effective exchange rate is down 6 percent from its April peak and now stands about 3 percent above its long-term average," the Commission said.
"The U.S. dollar is also closer to its long-term average in real effective terms," it said.
(Reporting by Jan Strupczewski, editing by David Brunnstrom)