The eurozone economy is stagnating, and may fall into recession in the new year, according to a press report.

Economists at leading investment banks believe growth in the euro area slowed to a standstill during the final three months of 2002, and will contract early next year, the Business newspaper reported.

Weak consumer spending, sluggish industrial production, and faltering business confidence are to blame.

"The euro area is experiencing a mini-recession this cold winter, with no growth at all in the last quarter of 2002 and a dip into negative territory in the first quarter of 2003," Morgan Stanley economist Eric Chaney told the Business.

"We cannot even exclude an outright recession, two or three consecutive quarters of negative GDP growth."

Forecasts trimmed

Morgan Stanley has cut its eurozone growth forecast for 2003 to just 1%, down from 1.4% previously, the Business said.

Rival investment bank HSBC has also cut trimmed growth forecast, while other banks, including Goldman Sachs, are expected to follow suit next week.

The growing gloom over the euro area's economic prospects will reinforce the case for further cuts in eurozone interest rates.

The European Central Bank bowed to pressure for cheaper borrowing costs earlier this month, cutting rates by half a percentage point to 2.75%.

The move followed a year-long rate freeze aimed at curbing persistently high inflation.

Germany falls behind

The eurozone's woes are partly due to weakness in Germany, the bloc's economic powerhouse.

Falling business confidence and weak consumer spending are stifling German growth, and tax increases due to come into force next year are expected to exacerbate the problem.

"As taxes hit consumers, we expect Germany's GDP to contract in the first quarter, on the heels of a fourth quarter already printed in red ink," Morgan Stanley's Eric Chaney said.