EU cuts economic forecasts

The recent credit crisis has "tilted the balance of risks to the downside," the Euro Commission said and cut its forecast for annual economic growth in the euro currency zone and the European Union.

It predicts that the 13-nation euro area will grow 2.5 percent in 2007, down from an earlier forecast of 2.6 percent, while the entire EU should expand 2.8 percent instead of 2.9 percent. Inflation in the euro area would be slightly higher than expected, up 0.1 percentage point to 2 percent, taking it just above the European Central Bank guideline for deciding to raise interest rates.

The EU's executive arm insisted that Europe had been in good shape before the August financial turmoil, when banks became reluctant to lend amid fears of spiraling losses from the U.S. housing loan market.

"Fundamentals continue to be sound," it said, refusing to quantify the possible impact on the global economy but saying it had increased uncertainty.

The crisis could affect confidence and growth to a greater extent in the fourth quarter, it warned, and force growth to slow down more markedly next year.