European Zone Economy’s Recession Risk High: British Economists

Business Materials 15 September 2008 17:54 (UTC +04:00)

Azerbaijan, Baku, 15 September / Trend corr A.Badalova/ Finance ministers and heads of the central banks of the European Union (EU) held a 2-day unofficial meeting in Nice at the end of last week to analyze the deteriorating situation in the European zone and to take economic stimulation measures.

The meeting was presided over by France. However, a set of measures was not devised. EU finance ministers only agreed to coordinate measures to prevent inflation growth.

Meanwhile, experts are more often forecasting deterioration of economic situation in Europe. Last week, European Commission's administration reduced its forecast on European zone's GDP growth in 2009 from 1.7% to 1.3% and increased the inflation forecast from 3.1% to 3.6%. The Commission forecasted the most complicated situation in UK, Spain and Germany - the countries will face recession this year.

However, European zone finance ministers ruled out the recession probability. They said inflation control in the region is of key priority.

According to analysts of UK Capital Economics, a leading independent macroeconomic research consultancy, the risk is high for European zone's economy to enter technical recession.

"With the business surveys so far pointing to another fall in GDP in Q3, there remains a significant risk that the euro-zone has entered a technical recession," Capital Economics economist for Europe Jennifer McKeown said. "But at least there is some evidence that underlying economic conditions are not quite as weak as Q2's 0.2% fall in GDP might suggest."       

According to the data published at the beginning of September, European zone's economy has fallen 0.2% between April and June 2008. The index is the first negate one fixed since 1999.   

According to recent forecasts of the Confederation of British Industry (CBI), the UK's leading employers' organization, UK's economy will fall 0.1% in Q4 2008. Economic growth in UK will total 0.3% in 2009.

The latest data have brought some hope that the recent downturn has been partly due to one-off factors and the temporary effect of high inflation, McKeown said.

"We now expect GDP to fall by around ¼% next year, the first full-year contraction in the economy since 1991. After growth of about 1.2% this year, we now expect the UK economy to contract by about 0.2% in 2009. (We previously forecast growth of +0.5%)," she said.

"With house prices set to fall sharply throughout 2009, we doubt that there will be any meaningful pick-up in GDP growth until the start of 2010 at the earliest. We now expect prices to fall by around 25% over the next three years. We expect the economic downturn to have a further negative impact on the housing market. With a range of fair-value measures suggesting that Spanish house prices are now just as overvalued, prices look likely to fall by more than 15%," said McKeown.

"But while we still expect a lack of economic imbalances to ensure that Germany outperforms other major economies next year, we have revised down our forecast from 1.5% to 1.0%. Annual GDP growth should average a fairly healthy 1.7% in 2008," said Makeoun.

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