EU predicts Britain is on course for recession by year's end

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The Independent Online

The European Commission has issued the gloomiest official assessment so far of prospects for the UK.

The Commission slashed its growth forecast, predicting that the economy will shrink by 0.2 per cent in each of the third and fourth quarters of this year. This leaves the British economy firmly on course for recession under the most widely used definition, two successive quarters of negative growth.

For 2008 as a whole, the rapid slowdown in economic activity has the Commission cutting its forecast for the UK from 1.7 per cent to 1.1 per cent. The UK and Spain are the member states that will fare worst under current economic conditions, says the EC, and, with Germany, the ones that will undergo a recession.

In the case of the UK, the Commission effectively contradicts British ministers' claims that this country is better placed than its neighbours to withstand what the Chancellor, Alistair Darling, recently described as "arguably the worst" economic times in 60 years.

The European Commission's view comes a few days after the Organisation for Economic Cooperation and Development also predicted that the UK would slide into recession, albeit a shallow one, in the second half of this year.

In its last definitive opinion on the economy, published last month, the Bank of England predicted "broadly flat" economic activity, and conceded the possibility that that could entail two or more quarters of negative growth. The UK recorded zero growth in the second quarter, ending a 16-year uninterrupted run of expansion.

The Commission's forecast for growth across the whole European Union, which includes fast-growing new members such as Poland, was also revised downwards for this year, from 2 per cent to 1.4 per cent. Poland is tipped to enjoy 5.4 per cent growth this year.

The EU's largest economy, Germany, saw a severe fall of 0.5 per cent in growth in the second quarter, and this, say the Commission's economists, will be followed by shrinkage of 0.2 per cent in the next quarter before a small bounce back of 0.2 per cent in the last three months of 2008.

Italy's economy will be stagnant (up 0.1 per cent) and France will finish slightly behind the UK (1 per cent growth for 2008). The Netherlands will boast "moderate" (2.2 per cent) growth.

Inflation in the UK was put at 3.6 per cent for the year. The EC raised its EU inflation estimate to 3.8 per cent from 3.6 per cent previously. "This represents an upward revision, although inflation could be at a turning point as the impact of past increases in energy and food prices gradually fades in the coming months," the Commission said.

In a separate move, the president of the European Central Bank, Jean-Claude Trichet, issued another "hawkish" warning on price rises, and called once again for wage restraint. "It is of the essence that all relevant authorities, price setters and social partners meet their responsibilities," Mr Trichet remarked.

Joaquin Almunia, the EU's economic and monetary affairs commissioner, said: "This is not good news indeed. We are living in a very uncertain environment... The continuing 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."

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