UK recovery threatened as eurozone powerhouses stumble

Europe is crashing back into recession as storm clouds gather over the region's twin economic powerhouses, Germany and France, experts have warned.

The latest evidence of the eurozone's woes comes less than 24 hours after the Office for Budget Responsibility slashed its forecasts for the region, predicting a 0.3 per cent decline this year for the UK's biggest export market. The Government's independent watchdog says an intensifying debt crisis in Europe and soaring oil prices are the biggest threats to the UK's recovery.

Yesterday's downbeat surveys of Europe's manufacturing and services sectors by the financial information company Markit showed that France was sucked back into a slump this month as manufacturing output fell and the services sector trod water. Germany meanwhile is suffering its weakest private sector growth in four months amid a worrying slide in export orders and the first fall in manufacturing jobs for two years.

Gloomy news from China also dampened the mood as its manufacturing sector shrank in March, fuelling fears of a hard landing for the world's second biggest economy.

The FTSE 100 shed almost 1 per cent as investors pulled money out of shares and into safe-haven gilts.

Markit warned that the eurozone's peripheral strugglers such as Spain, Italy, Greece and Portugal were faring even worse than its bigger players, putting the 17-member single currency bloc on course for a 0.2 per cent contraction in the first quarter on top of a 0.3 per cent slide in the final three months of 2011. The worsening economic news comes despite the European Central Bank pumping in more than €1 trillion (£835m) to prop up the financial system.

Markit's chief economist, Chris Williamson, said: "The eurozone is heading into a double-dip recession, China's manufacturers have had their worst quarter for three years and the Chancellor is talking about boosting exports. Where to?

"The risk is now geared towards a steeper downturn than any sort of recovery. The German and French numbers came in below even the lowest expectations."

Manuel Maleki, an analyst at ING, warned that France's economy would remain in the doldrums as tax rises kicked in and Nicolas Sarkozy fought against rival Francois Hollande for the French presidency. "This is likely to push firms and households to be cautious as long as there is no strong view on the result," he said.

The OBR reckons the UK will avoid a double-dip recession, but its fortunes are closely tied to the fate of the eurozone. The watchdog's detailed Budget analysis said a chaotic default by a European struggler would tip the economy back into a renewed slump, with the UK potentially shrinking 1.9 per cent under its downside scenario.

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