EU sees eurozone flirting with recession

September 10, 2008

, BRUSSELS, September 10 – The 15 countries sharing the euro are teetering on the brink of recession, the European Commission said on Wednesday, slashing its economic forecasts.

Although the bloc as a whole was forecast to escape a recession, Germany, Spain and non-eurozone member Britain will not be so lucky, according to estimates from the European Union\’s executive arm.

The commission cut its eurozone growth estimate for the whole of 2008 to 1.3 percent from a forecast of 1.7 percent dating from April, which would mark a sharp slowdown from the solid 2.6 percent growth recorded last year.

"The economic slowdown will be quite pronounced and longer than initially foreseen," said Luxembourg Finance Minister Jean-Claude Juncker, who chairs regular meetings of his eurozone counterparts.

After the eurozone economy contracted 0.2 percent in the second quarter, the commission predicted it would stall in the third quarter and expand only 0.1 percent in the final three months.

If the forecast bears out, it would mean that the eurozone will be spared a technical recession, which economists define as two consecutive quarters of contracting economic activity.

It also estimated that European economic heavyweight Germany was lurching into a technical recession and that Britain and Spain would follow in the second half of the year. However, France and Italy would be spared.

"The continuation of the turmoil in the financial markets one year on, the near doubling of energy prices over the same period and the correction in some housing markets have had an impact on the economy," EU Economics Commissioner Joaquin Almunia said.

The commission also forecast that the 27-nation EU economy would grow only 1.4 percent this year, down sharply from the 2.0 percent it predicted in its last estimate dating from April.

While growth was seen slumping, inflation was forecast to remain high, estimated at 3.6 percent this year in the eurozone, well above the European Central Bank\’s comfort zone of a rate close to but less than 2.0 percent.

"Despite the growing risk of eurozone recession, the European Central Bank is currently giving no sign at all that it is anywhere near to cutting interest rates given current well above-target inflation," said economist Howard Archer at consultants Global Insight.

While consumers and businesses may not be able to count on easier interest rates, Almunia said that "the recent fall in oil and other commodity prices and the easing up in the euro exchange rate have provided some relief."

Oil prices have steadily fallen to about 100 dollars a barrel after hitting a record close to 150 dollars a barrel in July while the euro has also lost ground, falling from a record 1.60 dollars in July to about 1.41 dollars.

ECB President Jean-Claude Trichet said that the development of oil and food prices in the months ahead would be crucial to how well the eurozone economy copes with sharply slowing activity.

"The current episode of weak economic growth is expected to be followed by gradual recovery in particular if a fall in oil prices from a peak in July will help strengthen real disposable income," he told lawmakers at the European Parliament.

The ECB is currently forecasting eurozone growth this year of 1.1-1.7 percent and 0.6-1.8 in 2009.

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