Europe's economic growth will slow for a third straight year in 2009, to 1.5%, as higher inflation on the continent cuts into consumers' disposable income, the European Commission announced Monday.

The projection, provided in the EC's spring economic forecast, is 0.6 percentage points lower than the 2.1% 2009 GDP forecast projected in November 2007, and below the 1.7% growth rate anticipated for 2008.

Further the EC expects euro-zone inflation to increase to 3.2% this year, up from 2.6% in 2007, and then decline to 2.2% 2009.

Moreover, it's that higher, projected inflation for 2008 that in part led to the EC's more-modest growth expectations for 2009: the EC does not expect the European Central Bank to lower interest rates in the near future, as it attempts to reign-in rising inflation.

Europe's inflation rises

Higher oil, grain, and other commodity prices have amped-up inflation in both the United States and the European Union. However, the end of the housing boom in the U.S. economy has also substantially slowed the world's largest economy to near-recession levels, while Europe, with fewer housing-related problems to-date, has managed to maintain a modest growth level.

London-based economist Mark Chandler told BloggingStocks Monday Europe and the ECB can afford to maintain current interest rate levels, for now, to fight inflation, but that the hawkish stance may have to change, if EU growth declines conspicuously in 2H 2008.

"Right now there's just enough growth not to force the ECB's hand, so their focus will be on Europe's level of inflation," Chandler said. "But if growth starts to drop off the table in the second half of the year, they'll have no other choice but to cut rates. Cutting in the second half runs the risk of ending the inflation fight too soon, but employment levels are key. At present, employment levels are adequate."

Affected by U.S. slowdown

Indeed, the EC specified that Europe would not be immune to the U.S.'s pronounced slowdown, saying that "the labor market is now softening and employment growth is expected to be halved this year ... to 0.8%"

The EC added that "the EU economy will not escape unscathed. Investment growth is weakening due to a cooling-off of overvalued housing markets and the cyclical slowdown," also noting that it expects employment and real wage growth to decelerate this year, and consumer confidence to decline.

Chandler said the ECB will also monitor Europe's small-to-medium sized companies and their hiring plans. "They're the most flexible and dynamic aspect of Europe's economy. If they end hiring plans or telegraph that they're pulling back on business initiatives, that will be another economic danger signal for the ECB."