UK economy will fall into recession

Sep 11 2008 by Bill Gleeson, Liverpool Daily Post

THE UK economy will fall into recession this year, the European Commission predicted yesterday.

The commission – the executive branch of the EU – said UK gross domestic product (GDP) will shrink by 0.2% between July and September, and another 0.2% during the final three months of the year. That meets the definition of a recession as two successive quarters of negative growth.

It follows another UK recession warning from Paris-based think tank the OECD last week.

The UK’s economic performance over the second half of this year is worse than the euro area’s predicted average growth, which will be flat over the third quarter and edge up 0.1% in the fourth.

The EC also downgraded the UK’s annual GDP growth this year, from 1.8% to 1.1%. This compares with a 1.3% average for the euro zone.

Spain will join the UK in recession by the end of this year, the EC added.

Europe’s biggest economy, Germany, entered recession in the second quarter of this year, the body said, but will recover marginally during the fourth quarter.

Explaining the basis for the forecasts, the EC said: “Tensions in financial and asset markets, ongoing moderation of growth in the world economy, the elevated levels of commodity prices and a widening housing shock are taking a toll.”

The OECD forecast the UK economy would contract 0.3% in the third quarter, and by 0.4% in the fourth on an annualised basis.

The forecast made “significant revisions” for economic growth prospects for the rest of the year in Spain and Britain, largely due to the countries’ housing market woes.

UK house prices have fallen nearly 13% year-on-year, Nationwide Building Society said last week, severely impacting on consumer confidence.

The EC said: “A downturn in housing markets is likely to affect overall economic activity adversely.”

About the UK’s prospects this year, it added: “GDP growth in the second half of 2008 is expected to turn negative, with output contracting slightly in each quarter, driven by a continued weakening of domestic demand.

“Private consumption is likely to fall somewhat due to the combined impact of tighter credit conditions for household borrowing, weakening housing and labour markets and inflation-induced stagnation in real disposable income.”

Official UK data showed the economy ground to a halt during the second quarter. Inflation is also forecast to rise to around 5% by the end of this year.

The EC interim forecast is based on updated projections for Germany, Italy, France, Britain, Poland, Spain and the Netherlands, which together account for around 80% of the European Union’s GDP.

Joaquin Almunia, the EU’s economic and monetary affairs commissioner, said the economic outlook remains fragile, but added that a recent drop in the euro against the US dollar and a drop in oil prices are providing some relief.

But he said oil and food prices have risen to record highs, fuelling inflation and putting a hamper on growth this year.

“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,” Mr Almunia said.

The British Chambers of Commerce has explicitly warned Britain’s economy will enter a recession within the coming year.

David Kern, economic adviser to the British Chambers of Commerce, said: “We agree the UK is now in technical recession.

“But the UK has performed better than the main eurozone economies so far this year, and it is important to refute misleading impressions that our economy is worse off than the eurozone.”

Chancellor Alistair Darling told the TUC conference in Brighton yesterday that the UK economy “will slow down”.

“But with strong fundamentals, and with the right support from the Government, we will get through this,” he added.