TheStreet

The European Commission slashed its growth forecast for the European economy Thursday, but stopped short of predicting a deeper recession in Italy, as the region braces for the impending departure of its biggest trading partner when Britain leaves the bloc at the end of next month.

In its regular quarterly forecasts, published today in Brussels, the Commission said it sees broader Eurozone growth to slow to 1.3% this year, down from a prior forecast of 1.9% before rebounding modestly to a 1.6% growth rate in 2020. The new forecasts are notably lower than the Commission had estimated in November and also included softer projections for currency area inflation of 1.4% for this year, well shy of the European Central Bank's 'just below 2%' price stability target.

"This slowdown is set to be more pronounced than expected last autumn, especially in the euro area, due to global trade uncertainties and domestic factors in our largest economies," said EU Economic Affairs Commissioner Pierre Moscovici. "Europe's economic fundamentals remain solid and we continue to see good news particularly on the jobs front. Growth should rebound gradually in the second half of this year and in 2020."

The euro was marked 0.3% lower against the U.S. dollar immediately following the European Commission release and pegged at 1.1331, extending its one month decline to around 1.8%. Benchmark German bund yields, a proxy for risk-free government borrowing rates in the region, fell to a two year low of 0.144%.

Germany 10-year yield approaches 0.1%#QEinfinity #Japanification pic.twitter.com/uAFJCahgxv

— Alberto Gallo (@macrocredit) February 7, 2019

Italy, which fell into its third recession of the last decade over the final three months of last year, is expected to grow by 0.2% in 2019, the Commission estimated. The assessment wasn't enough to ease pressure on Italian government borrowing costs, however, as benchmark 10-year Italian government bond yields rose 10 basis points to 2.942%, taking the extra yield, or spread, that investors demand to hold them instead of triple-A rated bunds to a two-month high of 2.79%.