EU on verge of recession

The EU cuts economic growth forecasts for Europe and predicts Germany, The UK and Spain will slip into recesion.

FRANKFURT // The European Commission slashed its economic growth forecasts for Europe late last night and predicted that three of the continent's largest economies Germany, the United Kingdom and Spain will officially slip into technical recession following two consecutive quarters of negative growth. The commission's comments are an admission that a downturn, which began in the United States 18 months ago, is hitting far harder than many imagined.

France, which holds the rotating presidency of the European Union, meanwhile rejigged tomorrow's agenda for a meeting of EU finance ministers in order to focus on the downturn, also admitting that things were looking much worse than initially expected. The commission, predicting what amounts technically to brief recessions in Germany, Spain and Britain, and not much better in other big economies, raised its forecasts for inflation at the same time as it lowered them for growth in the 15-country Euro zone and 27-strong EU of which the Euro zone is part.

It forecast gross domestic product growth of 1.3 per cent for this year in the Euro zone, and no longer the 1.7 per cent it was reckoning on in April, when the Commission and many policymakers saw no risk of recession in Europe. It forecast growth of 1.4 per cent for the broader EU, which includes Britain, Sweden, Denmark and several countries in the formerly communist eastern Europe, and no longer the 2 per cent it had been counting on in April.

Between April and now, policymakers have had to digest news that GDP shrank in the Euro zone in the April-June period, the first quarter of GDP contraction recorded since the currency bloc was created in 1999. Policymakers, however remained reluctant yesterday to use the word "recession". European Central Bank President Jean-Claude Trichet stuck to describing the current downturn as a "trough", while European Commissioner Joaquin Almunia declined to endorse the R-word at a news conference on the new forecasts.

"We will have a gradual recovery over the next years after the present depressed episode," Mr Trichet told the parliament. Jean-Claude Juncker, Luxembourg prime minister and chief spokesman for Euro zone finance ministers, inched a little closer however, saying that when it comes to the euro area, he "does not see risks of a recession", although he added that he could "see risks of a technical recession".

Mr Juncker, like Mr Almunia, said inflation, which struck a record annual rate of 4 per cent in July in the Euro zone but dropped marginally to 3.8 per cent in August after a dip in oil prices, was the key problem right now. What Europe can do about the problem will be discussed when Euro zone and then EU finance ministers and central bankers meet in France's southern riviera coast city of Nice tomorrow and Saturday, French officials said.

*With Reuters