Europe slashes growth forecasts

Europe's recovery is going to take time to build up

Growth in the 12-nation eurozone is likely to be just 1% in 2003, and even that slim expansion is under threat if war in Iraq drags on much longer, the European Commission has warned.

Germany, the largest economy in the eurozone, had the weakest growth forecast of 0.4% for 2003.

The UK, meanwhile, is predicted to grow at 2.2%, more than twice the rate of the average for the 12-member eurozone.

The strong prediction for the UK economy comes on the eve of Chancellor's Gordon Brown budget when he is expected to lower his previous forecast of 2.5%-3%.

GDP Growth 2003 (source EU)

Austria: 1.2%

Belgium: 1.2%

Finland: 2.2%

France: 1.1%

Germany: 0.4%

Greece: 0.4%

Ireland: 3.3%

Italy: 1%

Luxembourg: 1.1%

Netherlands: 0.5%

Portugal: 0.5%

Spain: 2%

Eurozone 12: average 1%

Denmark: 1.5%

Sweden: 1.4%

UK: 2.2%

EU 15: average 1.3%

In its regular forecast for European growth, the EC said that, under current conditions, growth should pick up in the second half of 2003, making recession unlikely, and accelerate further into 2004.

But the recovery remains fragile due to the global slowdown and the weakness of many of its economies - with powerhouses France and Germany and possibly Italy too breaching rules limiting budget deficits.

Unemployment remains a huge problem, the EC's estimate being that the 2002-4 period will see a total of 1.4 million more Europeans out of work.

And a prolonged war, with the risk of higher oil prices and sliding business and consumer confidence, would hurt the eurozone even more.

The Commission admitted that "a worse outcome cannot be excluded as the war against Iraq may last longer than earlier anticipated."

Downside risks

Even without an extended war, recovery will be weak, it said, citing weak balance sheets at corporations and the recent slide in consumer confidence, till now the motor of the world economy.

"With equity prices falling about 60% from the peak levels in Spring 2000, the speed and size of the stock market correction are comparable to the 1929 crash," the EC wrote.

Until Tuesday's forecast, the official EC line on growth was that 2003 would produce an expansion of 1.8%.

The new numbers also knock growth for 2004 back to 2.3% from 2.6%.

The speed and size of the stock market correction are comparable to the 1929 crash

European Commission

Within the eurozone, the countries whose forecasts have been cut the most are Germany, down to 0.4% from 1.4%; France, down to 1.1% in 2003 from 2%, and Portugal, down to 0.5% from 1.2%.

All three are running deficits bigger than what the EC's Stability and Growth Pact will allow.

But German growth, war permitting, should speed up to 2% the following year, as will Portugal, the EC said.

As for the three EU countries who have yet to adopt the euro, Britain is set to grow 2.2% in 2003 and 2.6% in 2004, down from previous forecasts but still better than all but three of its EU brethren.