Brussels doubles EU recession forecasts for 2009

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The European Commission has revised economic forecasts sharply downwards and pushed recovery predictions out to the second half of 2010 in the face of the "deepest and most widespread recession in the post-war era".

Brussels is now expecting Europe's GDP to contract by 4 per cent this year, twice the 1.8 per cent predicted just three months ago. The slump will also last longer, with a further decline of 0.1 per cent in 2010, compared with earlier forecasts of 0.5 per cent growth.

Of the major EU countries, Germany will fare the worst, with a 5.5 per cent decline in 2009. But the Commission's assessment will also make grim reading for the Chancellor of the Exchequer. The UK economy is expected to lose between 4 and 4.5 per cent in 2009, a far bleaker prediction than the 3.5 per cent forecast in Mr Darling's Budget. Italy is also expected to contract by up to 4.5 per cent, France and Spain by 3 per cent.

There are signs that the precipitous decline in manufacturing output may be slowing. But the effects of rising unemployment and continued downward pressure on inflation are hard to gauge. Joaquin Almunia, the EU Economic and Monetary Affairs Commissioner, said: "In such deep recession territory, risks remain sizeable."

Unemployment is expected to rise by 2.5 per cent this year and another 1.5 per cent next, adding some 8.5 million to Europe's dole queues. Not only will the rise take the overall rate to a post-war record of 11 per cent by 2010, but it will wipe out all job creation in the last two years. Exports and investment are also expected to suffer harshly, dropping by 12.75 per cent and 10.5 per cent in 2009.

The grisly data comes just days before the European Central Bank (ECB) is meeting to set eurozone interest rates. The bank is expected to drop the rate by 25 basis points to 1 per cent. It is also widely tipped to introduce other measures. Possibilities include lending to banks at fixed interest rates for longer than the current six months, and also the quantitative easing already being pursued by the Bank of England.

Howard Archer, at IHS Global Insight, said: "It looks likely the ECB will increasingly focus on 'non-standard' measures to boost economic activity. There is significant speculation it could announce it is to start purchasing assets, with bonds issued by banks among the most likely options."