By Simon Miller

The EU is set for a mild recession according to the forecast from the European Commission.

Its Interim Forecast predicts a stagnating GDP in 2012 with only growth set for 0% for the year in the EU and -0.3% for the eurozone – a downward revision of 0.6% and 0.8% respectively. .

The report said several factors had weighed in prompting a downwards revision of Autumn’s forecast with 2011 growth momentum weakening more than previously expected while the global economy has softened.

It added: “Moreover, negative feedback loops between weak sovereign debtors, fragile financial markets and a slowing real economy do not yet appear to have been broken.”

The report predicted that although there is growing evidence of a credit deceleration, “the risk of an outright credit crunch in the euro area as a whole has decreased”.

A recovery is still forecast for the second half of the year, but is expected to be more modest and to occur later than forecast in the autumn. The Commission said this reflected a more gradual return of business and consumer confidence, and therefore investment and consumption, as well as additional fiscal consolidation in a number of Member States.

The report added that the balance of risk to GDP growth remained “tilted to the downside” amid high uncertainly and the assumptions in the forecast was based adequate policy measures enacted at the EU and member-state level.

“If the sovereign-debt crisis were to rebound massively, with a broad surge in risk premia and spill overs across countries, severe credit rationing and a collapse in domestic demand would occur,” the report warned.

The report can be downloaded here.

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