The second quarter slowdown increases the risk of a double dip recession in Europe but the region should escape with sluggish growth this year, Standard and Poor's said on Tuesday in its latest forecasts.
The ratings agency lowered its forecast for eurozone growth to 1.7% this year from 1.9%, and to 1.5% next year (1.8%), after Eurostat reported 0.2% growth for the region in the second quarter.
"Although most of Europe experienced a slowdown in GDP growth in the second quarter, we still anticipate that the region will escape a genuine double-dip recession," said S&P in a research note.
"We see several sources of continuing growth over the next 18 months, including still buoyant demand from emerging markets and an ongoing recovery, albeit sluggish, in corporate capital spending," it added.
S&P lowered its 2012 GDP growth forecast for Germany to 2.0% (2.5%). It now sees French growth coming in at 1.7% in both this year and next (2.0%, 1.9%).
For Britain, which is outside the eurozone, it sees 1.3% growth this year (1.5%) and 1.8% in 2012 (2.0%).
S&P now forecasts the European Central Bank will keep its key lending rate on hold at 1.5% until spring next year, instead of hiking rates to 2.0% by year-end as it previously forecast.
Likewise it expects the Bank of England to keep its key lending rate at 0.5% until the second quarter of 2012.