Germany, UK, Spain risk recession as EU cuts GDP estimates

Brussels — The European Commission cut its 2008 growth estimates for the European economy to 1.4 percent Wednesday as three of the continent’s heavyweights risked slipping into recession.

The European Union executive’s latest interim forecasts suggest that Germany, Britain and Spain would be posting two consecutive quarters of negative growth this year.

If confirmed, this would fulfill economists’ technical definition of what constitutes a recession.

The commission also revised down its predictions for Gross Domestic Product (GDP) growth in the 15-member eurozone, from 1.7 percent to 1.3 percent. The cut was in line with analysts’ expectations.

But Joaquin Almunia, the European Union’s official in charge of economic and monetary affairs, brushed off suggestions that Europe might be on the verge of a prolonged period of economic decline.

Instead, the deepening of the global financial crisis, housing market collapses and soaring commodity prices had all contributed to produce "a sharper-than-expected slowdown" in Europe, he said.

"Europe might not be slipping into a technical recession but growth will remain very, very weak," said Simon Tilford, chief economist at the London-based Centre for European Reform.

Almunia’s office had in February forecast a GDP growth rate for the 27-member bloc of 2 percent. That estimate was already revised down by about half a percentage point from a November forecast.

In a statement accompanying Wednesday’s interim forecasts, the commission said plummeting business and consumer confidence, as well as falling industrial production and retail sales in Europe, suggest "a bleak outlook" for the EU’s economy.

GDP growth in Europe’s economic locomotive, Germany, was expected to fall by an adjusted 0.2 percent in the third quarter of this year after shrinking by 0.5 percent in the second.

But the country was nevertheless likely to produce a fairly robust unadjusted growth rate for 2008 of 1.8 percent, thanks mostly to a strong first-quarter result and a predicted rebound during the final three months of this year.

Britain and Spain, which have both been hit by severe downturns in their housing markets, were also predicted to slip into recession, with Spain’s third- and fourth-quarter rates dropping by 0.1 and 0.3 percent respectively, and Britain’s by 0.2 in both quarters.

The economies of Europe’s other two heavyweights, France and Italy, were also expected to stagnate during the second half of 2008, with Italy confirming its status as "the sick man of Europe" thanks to an overall growth outlook for 2008 of just 0.1 percent.

Almunia urged member states not to be tempted into "calls for protectionist and other trade-distorting measures."

Instead, governments should introduce structural reforms aimed at boosting consumer and investor confidence, enhancing their labor markets and increasing competition in the retail and energy sectors.

"The important thing is not if today’s estimates are exactly right, but what we can do to fix the situation … Structural reforms are easier to be adopted in good times but they are even more needed in these times," he said.

The commissioner planned to bring this message to EU finance ministers meeting in Nice this weekend.

Almunia’s office also revised upwards its 2008 average inflation estimates, from 3.1 to 3.6 percent for the euro area and from 3.6 to 3.8 percent for the 27-member bloc.

However, officials said that the gradual fading of the impact of past increases in energy and food prices suggest "inflation could be at a turning point."

In a hearing to the European Parliament on Wednesday, European Central Bank President Jean-Claude Trichet said he expected inflation in the euro area to drop to between 2.3 and 2.9 percent in 2009.

However, with consumer prices remaining well above the ECB’s target rate of about 2 percent, he hinted that interest rates, now at 4.25 percent, were not likely to drop any time soon.

"On the basis of its assessment, the governing council believes that the current monetary policy stance will contribute to achieving the objective of price stability over the medium term," Trichet said.

The ECB chief also said he expected the current period of financial turmoil to continue for some time.

Nicholas Rigillo/DPA/Expatica