Europe revises economic forecasts lower; 2010 recovery

European Central Bank President Jean-Claude Trichet said Monday that global economic growth this year will be "substantially below" a forecast made only about a month ago.

That forecast was for the economy in the 16 countries that use the euro currency to shrink up to 1%.

In a speech in Paris, Trichet said while next year will be "very difficult" there are reasons to believe a rebound could begin in 2010.

Last week the ECB slashed its main interest rate by a half percentage point to 2% — but signaled it would slow the pace of future cuts — as it sought to protect the 330 million people in the 16-country euro zone a deepening recession.

Earlier Monday, the European Commission forecast that the euro zone economy will shrink 1.9% in 2009, and the entire European Union economy will contract 1.8%.

The commission said 3.5 million jobs will disappear in the EU in the year ahead as business and household spending falls and banks tighten lending.

The European Union says it is facing a "deep and protracted recession" with government spending the only source of growth this year.

Government demand and investment will be the only source of growth — but that carries a heavy price tag. Government deficits will hit the highest level in 15 years as they borrow heavily to stoke growth.

It says the economy would be faring much worse without current EU nations' plans to boost growth by spending 1% of gross domestic product this year, which should help the economy expand an extra 0.75%.

The EU executive said the downswing will be particularly marked in Britain and more protracted in Spain.

It warned that the outlook is still exceptionally uncertain, describing the economic crisis as the worst faced by the world since World War II.

It predicts the EU could grow 0.5% in 2010. The first green shoots could come in the second half of 2009, when the global economy may pick up.

But the EU warned that "the main issue is whether the recovery will be a lasting one."

In Europe, it warned that it could not rule out that "very weak economic sentiment may continue for some time as concerns about a long and deep recession spread, particularly with unemployment now on the rise."

Falling exports will hit Germany hard. The Europe's largest economy is also the world's biggest exporter and will likely shrink 2.3% this year, it said.

It says the British economy will shrink 2.8% this year, while France will contract by 1.8%.

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