UK, Germany and Spain heading for recession, EU report forecasts

THE UK, Germany and Spain are heading into recession but the overall euro zone is expected to escape this prospect, according to figures published by the European Commission.

The commission, in an interim economic forecast published yesterday, cut back expected growth in the EU from 2 per cent to 1.4 per cent and in the euro zone from 1.7 per cent to 1.3 per cent.

The European commissioner for economic and monetary affairs, Joaquín Almunia, blamed the sluggish growth on the continuing turmoil in the financial markets, the near doubling of energy prices and the correction in some housing markets.

EU states must proceed with reforms to promote jobs and growth, he warned.

Germany was expected to go into “technical recession” after two consecutive quarters of a decline in growth, the benchmark used to determine recession. In the third quarter of 2008, German growth would fall by 0.2 per cent, following a fall in growth in the second quarter of 0.5 per cent.

The UK and Spain, badly hit by a downturn in their housing markets, were expected to fall into recession after third- and fourth-quarter decreases in growth – by 0.2 per cent in both quarters for the UK and by a 0.1 per cent and 0.3 per cent for the third and fourth quarters in Spain.

Growth in France and Italy is to stall but growth is expected to increase in Poland and The Netherlands.

As the forecasts are interim, they examine only the EU’s largest economies. The European Commission will publish forecasts for the rest of the EU, including Ireland, in November.

Both the overall EU and euro zone economies will stay static in the third quarter with a slight increase in growth of 0.1 per cent expected in the fourth quarter.

Mr Almunia refused to say that EU countries were headed for recession while the head of the group of euro zone countries, Jean-Claude Juncker, speaking at the European Parliament, said: “I don’t see risks of a recession, although I can see risks of a technical recession.”

Jean-Claude Trichet, president of the European Central Bank (ECB), also speaking at the European Parliament, warned that inflation – according to the commission expected to remain high at 3.8 per cent for the EU and 3.6 per cent for the euro zone – must be brought down.

He said he was confident the ECB monetary policy would bring down inflation but warned against national wage demands pegged to inflation increases.

“The governing council is concerned about the existence of nominal wage indexation schemes, as they involve the risk of triggering an inflationary wage-price spiral. The governing council calls for these schemes to be abolished,” Mr Trichet said.