Europe dragged down by weak UK

Europe’s economic growth will grind almost to a halt next year, dragged down by a weak UK, but the continent will fare better than the US, according to the European Commission.

In spite of some confidence returning to financial markets, Europe’s outlook was “precarious”, the European Union’s executive arm warned in its latest forecasts. The global banking crisis was aggravating the impact of housing market corrections and slower growth elsewhere in the world.

EU growth would slow from 1.4 per cent this year to just 0.2 per cent in 2009, while the eurozone economy would expand by 1.2 per cent this year and only 0.1 per cent in 2009. For both regions, that amounted to a dramatic downward revision of forecasts made in April, when the Commission had expected 2009 growth of 1.8 per cent in the EU and 1.5 per cent in the eurozone.

The grim outlook prompted Joaquín Almunia, EU economic affairs commissioner, to call for “co-ordinated action at the EU level to support the economy” in the way governments had acted together to shore up the banking system.

Policymakers faced exceptional uncertainties and “neither the European Commission, nor the OECD or IMF has experienced this kind of crisis,” Mr Almunia said on Monday. But global economic interdependence was clearly greater than previously thought. “De-coupling is no more there for Europe, no more there for emerging countries, it’s no more there for anyone.”

The eurozone, several of its members, and other EU countries were in or would soon fall into technical recessions – two quarters of contracting gross domestic product – according to the forecasts. Unemployment would rise across the continent, most noticeably in Spain.

Among the EU’s largest economies, the UK would be the worst performer next year, when its economy would contract by 1 per cent, the Commission forecast. Financing conditions were subject to “sizable” differences across EU countries, but the UK was already experiencing a credit crunch. UK private consumption would see a marked fall in 2009 and 2010.

Spain and Ireland, also hit by falling house prices, would see GDP falling by 0.2 per cent and 0.9 per cent respectively. Germany, France and Italy would see zero growth in 2009. Growth would slow in eastern Europe but countries such as Poland and the Czech Republic would remain among the best performers.

The Commission expected a slow EU recovery to be under way by 2010, with Mr Almunia talking about a eurozone revival starting in the second half of 2009. But the outlook depended crucially on how the crises in financial markets interacted with the real economy.

A bright spot was the forecast rapid deceleration in price pressures. Eurozone inflation would average 2.2 per cent next year and 2.1 per cent in 2010.

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