The European Central Bank (ECB) has warned that the risks to economic growth will remain sizeable during the rest of this year in the 12-nation eurozone.

In its August monthly report, the bank pointed to problems elsewhere in the world economy and, closer to home, recent weaker than expected economic data.

"Real gross domestic product (GDP) growth in the first half of 2001 is therefore now expected to have been below the levels projected earlier and this has implications for growth estimates for the year a whole", the ECB said.

"There is, therefore, increased uncertainty surrounding growth in the second half of 2001."

Consumer confidence slips

The bank highlighted "the potential impact of changes in confidence on domestic demand" as a factor to watch.

Economic data from France and Germany has suggested that consumer confidence is slipping, threatening to spread the slowdown beyond manufacturing.

In its report, the ECB said its current stance on interest rates was "appropriate" but added that "there is a need to monitor closely developments that may affect this assessment". Analysts say the wording suggests a change of heart.

On the same day as the ECB's last meeting at which it once again resisted pressure for a rate cut, the French statistics agency INSEE announced that consumer confidence in France had fallen to its lowest level in more than a year.

And in Germany, a survey of retailers predicted no growth in sales for the rest of this year.

The European Commission's economic sentiment indicator dropped to 100.6 in July from a revised 101.2 in June, with declines also seen in the indicator for industrial and consumer sentiment.

Interest rate hint

The ECB left its key refinancing rate unchanged at 4.5% at the 2 August meeting.

However, the bank's August monthly report says that worries about inflation, which have restricted its room to cut interest rates, are easing.

Eurozone inflation fell to 3.0% in May from 3.4% in June. Though this remains above the ECB's 2% target, the bank said preliminary data from several countries "indicate that eurozone consumer price inflation may have declined further in July".

"In the absence of further unfavourable shocks, the decline in consumer price inflation is expected to continue, with possible temporary interruptions," the report said.

The next meeting of ECB governors is due on 30 August. Most economists are expecting the bank to cut rates again.