Recession in the euro zone looks 'probable'

An economic recession in the euro zone is probable, Deutsche Bank, Germany's largest bank in terms of market capitalisation, said.

"We have lowered our gross domestic product forecast for 2008 to 1.2 per cent (1.7 per cent previously) and to 0.1 per cent (0.8 per cent previously) for 2009," the bank said in a research note.

The banks cited four reasons for the likelihood of a recession: weaker demand for exports; reluctance of banks to extend credit for investment; damped private consumption as a consequence of higher raw material prices; and a weakening housing market leading to higher savings.

The forecasts are far more pessimistic than those of the European Central Bank and other multilateral institutions. The ECB will provide fresh staff projections on the economy September 4.

In June, ECB and national central bank staff said growth would range around 1.5 per cent-2.1 per cent this year, though noted risks were tilted to the lower end.

Earlier this month, ECB President Jean-Claude Trichet said mid-year growth would be "substantially weaker" than robust growth in the first quarter, and that some of the identified economic risks had materialised.

Deutsche Bank also said further signs of a recession will be necessary to convince the ECB to cut interest rates.