There is a growing chance the euro zone economy will slip back into recession as fears rise that the debt crisis will escalate, financial markets slump further and a global slowdown knock growth, a Reuters poll predicted on Thursday.
The poll of 70 economists taken in the past week gave a median 40 percent chance of a return to recession, up from a 30 percent chance given in a poll taken just a month earlier and a mere one-in-five in August.
Leading indicators point to weaker economic conditions. Sentiment surveys have deteriorated across key sectors of the euro zone economy, against a backdrop of unusually high uncertainty and financial market tensions, said Ken Wattret at BNP Paribas.
Recent purchasing managers' indexes suggested the bloc's private sector contracted for the first time in two years last month as new business dried up, while the debt crisis cut expectations for the future to two-year lows.
But euro zone industrial production was much stronger than expected in August, data showed on Wednesday, indicating the economic slowdown in the third quarter might be smaller than feared.
Ten of 41 contributors polled this month predicted a recession, technically two consecutive quarters of contraction, compared to none in last month's poll.
The euro zone economy expanded just 0.2 percent in the second quarter of this year but that is a pace it will find hard to beat until the same quarter next year, poll forecasts showed.
The poll predicted no growth in the current quarter, down from 0.2 percent in last month's poll, and just 0.2 percent for the first three months of 2012, revised from 0.3 percent.
The outlook for next year was revised down to 0.9 percent growth from 1.2 percent and for this year it was cut to 1.6 percent from 1.7 percent.
Forecasts for Germany, Europe's largest economy and the backbone of the bloc's recovery, were slashed, while those for France followed a similar path.
Europe has struggled for agreement on how to prevent a debt crisis that first struck peripheral members from spreading to core nations but leaders will meet at the end of the month and a new comprehensive plan is expected to be discussed.
It's now clear that the key European policymakers are determined to address the crisis in a comprehensive way ahead of the G-20 meeting in Cannes in early November, said Erik Nielsen at UniCredit.
The European Union executive is drafting plans for member states to coordinate a recapitalisation of banks, as regulators meet to check the capital buffers of stressed lenders they had granted a clean bill of health in July.
To help banks withstand a further worsening of the debt crisis and growing tension in the interbank market, the European Central Bank last week threw another lifeline to commercial banks by renewing offers to lend them one-year funding.
According to the poll, the ECB will cut interest rates by 25 basis points in the next couple of months, reversing direction after two hikes earlier this year, and again early next year, taking its benchmark rate back to 1.0 percent.
That is in line with a poll taken last week after the central bank left rates on hold at 1.5 percent.
ECB President Jean-Claude Trichet, who will be replaced at the end of the month by Italy's Mario Draghi, seen as more dovish on inflation, said after the meeting that the economic outlook remains subject to particularly high uncertainty and intensified downside risks. His shift in rhetoric cemented views that rates would come back down.
The ECB had already moved to a clear easing bias at its September meeting, stating that the risks to growth were on the downside, and risks to inflation were no longer to the upside but broadly balanced, said Nick Matthews at RBS.
None of the central banks in the United States, Japan and Britain are expected to raise rates before 2013.
In contrast to the growth forecasts, inflation expectations rose but the rate was still seen slipping below the ECB's two percent target ceiling from April next year. The bank has missed the target for 10 months in a row.
It was seen averaging 2.6 percent this year, up from 2.5 percent forecast last month, and an unchanged 1.8 percent in 2012.
The gloomier growth outlook pushed economists in the poll to revise up their unemployment predictions, seeing it averaging 10 percent across this year and next, higher than the 9.8 percent 2011 and 9.4 percent 2012 forecasts in July's poll.