UK to narrowly escape recession, European commission forecasts

Brussels lowers forecasts – but says Britain will grow 0.6% this year while the eurozone suffers a 'mild' recession

The UK will narrowly escape recession in the first half of this year as Europe as a whole stagnates and the eurozone suffers a short-lived, "mild" contraction, according to the latest forecasts from Brussels.

The ultra-cautious prediction by the European commission's economic experts, revised down from three months ago, came as an array of European banks, including RBS and Crédit Agricole, declared multibillion-euro losses for 2011 because of the Greek debt crisis.

Greek MPs approved this week's savage terms for a €130bn (£110bn) bailout but Martin Blessing, the chairman of Commerzbank, Germany's second-biggest bank, said the 53.5% nominal haircut for private-sector bondholders was "as voluntary as a confession to the Spanish Inquisition".

Olli Rehn, EU economic and monetary affairs commissioner, is forecasting that the British economy will grow by just 0.1% in each of the first two quarters before – boosted by the Olympics – output rises and overall growth reaches 0.6% for 2012. That is the same as Germany, the EU's powerhouse economy, and more than France's 0.4% and Holland's -0.9%.

The UK economy could, however, be knocked by weaker growth in its export markets, especially the euro area, and depressed confidence brought on by the protracted sovereign debt crisis. Inflation would drop this year to 2.7%, the European commission said.

Rehn said the contraction in the eurozone would be 0.3% compared with forecast growth of 0.5% made in November last year, while the EU as a whole would see zero growth compared with a forecast 0.6% three months ago. Prospects had worsened since then but, the Finnish liberal said, "there are signs of stabilisation, especially in the more recent period".

He admitted confidence was down but said the latest economic sentiment index, for January, was up for the first time since May 2011. In Germany, the IFO Institute saw the fourth straight monthly rise in business confidence.

There was little evidence of confidence in the banking sector. Commerzbank's Blessing said: "The high degree of uncertainty associated with the European sovereign debt crisis will … continue to pose challenges for us." The bank, which is in the throes of a €5.3bn recapitalisation, wrote down €700m more of its Greek debt holdings, but managed to make net income of €316m in the fourth quarter.

RBS showed an overall £1.1bn loss on its Greek holdings while Crédit Agricole, France's "green" bank, wrote down €2.38bn for 2011, giving an annual loss of €3.07bn. Dexia, the Franco-Belgian bank almost brought down by its Greek bonds, said it lost €11.6bn in 2011.

Rehn said better capitalisation of Europe's banks was one of five factors helping to ensure the recession would prove short-lived. He is banking on the Greek – and Portuguese, Spanish and Italian – debt crisis proving manageable, with uncertainty "gradually fading away".

But critics of the austerity programme imposed on the eurozone were unconvinced. Sony Kapoor, of the Re-Define thinktank, said: "The sharply deteriorating economic forecasts underscore why despite the lull arising from a quietening of the acute phase of the crisis, EU policymakers must not be allowed to procrastinate and become complacent, a pattern that has characterised EU decision-making from the start of the crisis."

Italy is forecast to contract by 1.3% in 2012 while Spain suffers a 1% cut in national output. The new centre-right government of Mariano Rajoy has asked for a higher budget deficit target than the 4.4% imposed by Brussels because of recession, but Rehn refused to signal agreement. However, he did side with the IMF and most EU countries against Germany by backing an increased firewall to guard against contagion from Greece spreading by combining the current and future rescue funds, the EFSF and ESM, into one €750bn vehicle.


David Gow

The GuardianTramp

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