Germany, UK and Spain face recession

Quoted from the Financial Times By Ralph Atkins in Frankfurt

Germany, the UK and Spain all face recessions this year, the European Commission forecast on Wednesday, dashing finally any remaining hopes that Europe would avoid a sharp economic downturn. France and Italy would fare little better, it said.The steep downward revisions in growth forecasts by the European Union’s executive arm showed it had accepted that tumbling business and consumer confidence was hitting economic activity – even though the European economy had been “generally sound” prior to the credit crisis . Joaquin Almunia, economics and monetary affairs commissioner, described the environment as “difficult and uncertain”. As well as financial turmoil and a near doubling of oil prices over the past year, significant housing market corrections in some countries were taking their toll, he said.

The Commission expected the 27-country European Union economy to expand by 1.4 per cent this year, and the 15-country eurozone by 1.3 per cent, below the 2 per cent and 1.7 per cent it expected in its last forecasts, released in April. Germany’s economy is projected to contract by 0.2 per cent in the three months to September, taking it into technical recession – two quarters of contraction – after a fall of 0.5 per cent in the second quarter. The UK and Spain were expected to contract in both the third and fourth quarters.But France and Italy, which both contracted in the second quarter, were expected to see flat growth in the current quarter.

Jean-Claude Trichet, European Central Bank president, struck a more upbeat tone, telling the European Parliament that the “current episode of weak economic growth is expected to be followed by a gradual recovery”.But he reinforced expectations that ECB interest rates would remain firmly on hold by warning of a pick-up in eurozone unit labour costs that “has to be countered”. The ECB, which increased its main rate to 4.25 per cent in July, is particularly worried about wage indexation, which it fears increases the risk of current high inflation rates becoming entrenched. The Commission forecast eurozone inflation would average 3.6 per cent this year – above the ECB target of an annual rate “below but close” to 2 per cent.

Mr Trichet also complained about the “cartel” among oil producers. “Stabilisation of prices might be a good thing but stabilisation at a very abnormally high level is not a good thing.”The ECB president warned financial markets would not return to conditions that had previously been considered normal, with three-month interest rates likely to stay elevated. The economic outlook would also depend increasingly on the financial system’s fate. “The financial market correction could be gradually changing its nature and scope and evolve into a more traditional credit-cycle downturn.”

In similar comments – echoing the fears of US policymakers – the Commission said that, “a deceleration in real economic activity could amplify problems in the financial sector by decreasing the capacity of companies and households to service their debt-repayment obligations.” That could trigger a further tightening in bank lending standards.

ZULKIFLI HASAN
UNIVERSITY OF DURHAM

  • As a panelist together with Associate Professor Dr. Asyraf Hashim for the Capetonian Radio Station’s Talkshow, Cape Town, South Africa.

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