The outlook for the European economy has continued to deteriorate as the global financial crisis has intensified and the international environment has worsened. At the same time, domestic housing markets have weakened and business confidence has slumped. We still expect a relative lack of fundamental imbalances to mean that the downturn in most parts of the region is shallower and shorter than those likely in the UK and US. Meanwhile, sharp falls in inflation should allow the ECB and other central banks to cut interest rates significantly further – we now expect ECB rates to fall to 1.5%. But this won’t prevent the euro-zone economy from contracting by around 1% in 2009.
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