BRUSSELS (Reuters) - The euro zone's economy barely grew in the third quarter, the EU said on Tuesday, with collapsing business confidence and slowing industry pointing to a recession and likely giving the European Central Bank ground for an interest rate cut this week.
European statistics agency Eurostat confirmed its estimate that gross domestic product (GDP) in the euro zone rose by 0.2 percent in the quarter, compared to the previous three months.
The agency also confirmed economic growth of 1.4 percent in the third quarter compared to a year earlier.
"All the downside news and deteriorating business and consumer confidence are likely to be evident in the fourth quarter GDP reading, which we expect to show a contraction of 0.4 percent for the euro area.
"Our main take is that we will see a significant drop in investment due to the lack of confidence in industry, difficult financing conditions and concerns about the future of the euro.
"Effectively, the contraction will be greater than the last one in the second quarter of 2009, but it is nowhere near the -1.8 percent figure of the fourth quarter of 2008 and the -2.7 percent figure in the first quarter of 2009. So the situation is obviously negative, but still is in a mild fashion.
"It will be a recession, though, because we expect the contraction to continue into the first quarter of 2012.
"We are effectively going into a recession, but we are still very far from the recession of 2008/2009, pending obviously the decisions of European leaders at the summit on Thursday and Friday and the ECB Governing Council, that should show us the way forward.
"We do expect a rate cut of 25 basis points, but we don't rule out a 50 basis point cut."
"Euro zone GDP growth of 0.2 percent quarter-on-quarter is hardly a great performance but the fear is that this could be as good as it gets for the euro zone until the second half of 2012.
"Indeed, we now expect the euro zone to contract in the fourth quarter of 2011 and through the first half of 2012.
"In our December forecast, we are set to markedly downgrade our 2012 euro zone GDP projection to show contraction of around 0.5-0.75 percent overall in 2012 (we had previously forecast growth of 0.1 percent). We estimate GDP growth at 1.6 percent overall in 2011.
"We believe that the strong likelihood of clear euro zone contraction in the fourth quarter and darkened outlook fully warrant lower interest rates.
"We expect the ECB to deliver a 25 basis point cut from 1.25 percent to 1.00 percent at its policy meeting on Thursday as well as announcing extra liquidity measures to help banks.
"In fact, we now lean towards the view that interest rates could well come down to 0.50 percent in the early months of 2012 even though they never went below 1.00 percent during the 2008/9 recession.
"Meanwhile, the high probability of euro zone economic contraction in the fourth quarter and the serious threats to future activity coming from tightening credit conditions and depressed confidence makes it all the more important that euro zone politicians and the ECB finally take a quantum leap forward at their meetings at the end of this week in dealing with the euro zone sovereign debt crisis.
"Agreement on tighter fiscal rules, improved economic governance among euro zone members, and the announcement of sharply increased ECB action could bring a sustained marked easing of tensions, boost the markets and provide a much-needed boost to confidence."