European commission forecasts UK recession

The commission forecasts that the eurozone will only grow 1.3% this year

• Ashley Seager, economics correspondent
• guardian.co.uk,
• Wednesday September 10 2008 11:32 BST
• Article history

Britain will join several large European economies in slipping into recession in the second half of this year because of the credit crunch, high commodity prices and housing markets collapsing, the European commission said today.

Publishing its half-year economic assessment of the eurozone and other European economies, the commission said that the downside risks to economic growth in to its spring forecasts had materialised as had upside risks to inflation.

It echoed a report from the Organisation for Economic Cooperation and Development (OECD) in predicting that Britain would suffer a technical recession - defined as two consecutive quarters of contraction - in the second half of 2008, with the economy shrinking by 0.2% each quarter, leavinng overall growth for the year as a whole at 1.1% - a third as fast as in 2007.

"The main downside risks identified in the spring forecast have materialised, with the financial turmoil deepening, commodity prices soaring and the shocks to several housing markets spreading more widely," the commission said.

Although the 15-nation eurozone as a whole would avoid a technical recession, it would only grow 1.3% this year instead of the 1.7% the commission forecast six months ago. The downward revision brings its forecast bang into line with that of the Paris-based OECD.

Germany and Spain will also suffer a technical recession while France and Italy will stagnate, although probably not contract for two quarters, even though both contracted in the second quarter.

The commission raised its inflation estimate for this year to 3.6% percent from 3.1% previously. That is almost twice the European Central Bank's target of keeping inflation below, but close to, 2%.

"This represents an upward revision, although inflation could be at a turning point as the impact of past increases in energy and food prices gradually fades in the coming months," the commission said.

It said risks to the growth outlook remained more on the downside, and if they materialised, growth could be 1.1% this year rather than 1.3%.

"Risks to the inflation outlook (remain) more on the upside as the euro area might witness some second-round effects on inflation in the rest of the year, although there is no evidence of any widespread effects so far."