OECD: Eurozone Economy To Struggle Until 2010

The 16-nation euro zone's recession will continue through the first half of 2009 before a modest recovery kicks in, with above average growth expected by late 2010.

LONDON (AP) -- The 16-nation euro zone will not experience a strong economic recovery until the second half of 2010 at the earliest, the Organization for Economic Cooperation and Development (OECD) said Wednesday.

In its annual economic survey of the euro zone, the Paris-based organization confirmed its previous prediction that the recession, which started in the second quarter of 2008, will continue through the first half of 2009 before a modest recovery kicks in. Above average growth is only expected by late 2010, helped by massive fiscal stimulus and monetary easing.

"There are, however, serious risks to the growth outlook," it warned.

The OECD said the European Central Bank will have room to cut interest rates further but noted an unusual amount of uncertainty surrounding the economic outlook.

"If inflationary pressures turn out to be stronger than anticipated, room for manoeuvre will be constrained," it said.

So far, the OECD said there is little evidence that higher energy costs earlier in the year have fueled wage demands and price expectations remain well-anchored.

The European Central Bank is widely expected to cut interest rates again on Thursday, amid increasingly grim economic data and a sharper than expected drop in inflation, although the size of the reduction remains unclear.

Financial markets believe the Frankfurt-based bank will reduce its benchmark rate by half a percentage point to 2.0 percent, which would be its lowest level since December 2005, in an attempt to steer the euro zone economy away from a deep and prolonged recession.

Even though the ECB has reduced interest rates on three occasions since October from a high of 4.25 percent, its actions have been dwarfed by the more aggressive cuts enacted by the U.S. Federal Reserve and the Bank of England.

The OECD said the financial crisis has highlighted the need for an adequate regulatory system for the financial sector given the increasingly integrated nature of Europe's capital markets. It also said more could be done to enhance competition in retail banking.

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