Break-up of euro would cost UK 'less than feared'

Britain's economy would shrink by just 0.5 per cent if the single currency fails, think-tank predicts

Nick Clark,David Prosser
Monday 07 November 2011 01:00

As the financial crisis in Europe intensifies, the UK has been handed a boost after a respected think-tank predicted that should the euro collapse, it would cost the economy "much less than feared".

The Centre for Economics and Business Research (CEBR) said the "on-off" Greek referendum has forced Europe "to look over the edge and confront the issue of the break-up of the eurozone".

In a report released today, the body predicted that UK GDP would fall about 0.5 per cent in the year the euro collapsed, mainly driven by slower growth in export markets. Douglas McWilliams, chief executive of the CEBR, said: "But we do not think that a break-up would be anything like the disaster that has been argued."

He continued: "After five years we would expect the UK to be at least as well off if the euro breaks up as it would be under the alternative scenario of holding it together."

Should Greece leave the euro and default, the monetary impact on the UK "appears manageable", he said, as UK banks hold just £2.1bn of Greek sovereign debt. However, should Portugal and Italy follow, they will be left in a more precarious position.

A 0.5 per cent decline would bring the UK "precariously close" to no growth should the euro break up next year, the CEBR said. "A sharp downturn in business investment would push the country into a recession."

The report predicts the cost of the break up of the single currency would cause a 2 per cent contraction in GDP across the eurozone in the year it happens. If the eurozone stays together, the region is in for a decade of austerity, the body said.

However, "if it breaks up the immediate pain is much more intense but then there is a more stable basis".

While the outlook for the UK may be better than feared should the euro break up, data continues to emerge underlining dwindling consumer and business confidence.

Today, new research is published showing Britain's construction industry is so depressed about the economic outlook that it does not expect to return to growth for another three years.

Figures from the Construction Products Association show that output in the sector weakened significantly during the third quarter of the year and that new orders remained depressed.

The association said that falling demand and rising costs in the industry were combining to cause many companies evermore difficulties. It called for the Government to intervene in order to ease the plight of a key sector for the UK economy.

The trade body said it now expected construction output this year to be 1.1 per cent down on 2010 and that it thought the slowdown would be even more marked next year.

It said output was likely to fall by as much as 3.6 per cent during 2012, and does not now foresee a return to growth until 2014 at the earliest.

The warning will disappoint Government ministers who have been arguing that the construction industry is ready to put its woes behind it, despite the slowdown in consumer sentiment over the past few months.

However, many construction businesses believe that their best chance for a return to sustainable growth may be a new programme of works from the Government.

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