Page last updated at 13:22 GMT, Wednesday, 10 September 2008 14:22 UK

Britain 'to fall into recession'

German car production line
Many German exporters have been hit by the stronger euro

The UK, Germany and Spain will fall into recession in 2008, the European Commission has predicted.

Brussels said the three countries would see two negative quarters of economic growth in a row, which is the technical definition of a recession.

In its latest economic forecast, the commission also downgraded its outlook for eurozone growth again.

It said the 15-nation euro bloc would now grow by 1.3% this year, against previous projections of 1.7%.

Earlier this month, data showed the region's economy shrank by 0.2% between April and June - the bloc's first decline since its creation in 1999.

The contraction was driven by a slowdown in exports and consumer spending.

But high inflation in the region led policy makers at the European Central Bank to keep interest rates at 4.25% at its latest meeting, allowing no relief for the eurozone's slowing economies.

In its latest report, the commission believed that inflation was now likely to creep up to 3.6% in the eurozone - above its previous predictions of 3.2% and way above the government's target of 2%.

Gloomy outlook

Shaken by a housing slump and volatile financial markets, the Brussels-based organisation predicts that the UK economy, which is not a member of the eurozone, will shrink by an annual rate of 0.2% in each of the next two quarters.

A second quarter of negative growth is also expected in the German and Spanish economies, which are expected to contract by 0.2% and 0.1% respectively.

The grim outlook echoes forecasts from the Organisation for Economic Cooperation and Development (OECD) out earlier this week, which were even worse.

According to the latest official figures, the UK economy did not grow at all in the second quarter of 2008.

The European Commission said the UK economy would grow by 1.1% in 2008 - much less than the 1.7% previously forecast and a sharp reduction from the official Treasury forecast of 2.5%.

A Treasury spokesman told the BBC:

"Along with every other country in the world, the UK is facing the twin shocks of high food and fuel prices and the global credit crunch.

"As a result of these global shocks, the UK economy is slowing, as we are seeing around the world. Growth in the second quarter was zero in the UK and it was negative in Germany, France, Italy and Japan.

"But with employment levels near record highs, interest rates that are historically low and the past decade of rising incomes and job creation, the UK is well placed to deal with these challenges."

Stubborn inflation

Economic and Monetary Affairs Commissioner Joaquin Almunia blamed ructions in the financial markets, soaring commodity prices and the housing slump for the gloomy outlook.

"In a context of an unusually high degree of uncertainty, the external headwinds not only had a direct adverse impact on inflation and capital costs, but also an indirect one on confidence," he said.

Stamping out hopes of an interest rate cut in the near term, Mr Almunia said even if economic activity were to slow further, inflation risks were still "tilted to the upside".

"The risk of second-round effects can not be excluded, although there is no evidence of any widespread such effects so far."




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