George Osborne arrives in Hong Kong on Sunday for a three-day tour of Asia, in a bid to deflect attention from the deepening debt crisis on Britain's doorstep, as forecasters warn that the UK economy has already slipped into recession.
The chancellor will give a speech in Hong Kong urging Britain's businesses to look beyond the battered eurozone economy and seek trade partnerships in the far east. He will also visit other parts of China and Japan.
Osborne told reporters: "The problem of high indebtedness in western economies means these are challenging times for the world economy. But as we look to this difficult year ahead, I want to focus on reasons to be optimistic for the future. A richer, stronger Asia is an opportunity for the world, not a threat."
But as Osborne seeks to play up the economy's prospects, the Ernst and Young Item Club, which publishes its quarterly health check of the UK on Monday, is predicting two successive quarters of negative growth, starting in the final three months of 2011 – the widely accepted definition of a recession.
"There's little doubt that we are already in a technical recession," said Peter Spencer, who compiled Item's report. It expects unemployment to continue rising for another year, peaking at just under 3 million in 2013.
He said it should be a relatively shallow downturn, but added: "That's assuming the eurozone remains intact." A Treasury spokesman acknowledged that "this is a tough patch".
Fears about the impact of the eurozone sovereign debt crisis deepened, after ratings agency Standard & Poor's stripped France and Austria of the AAA rating, and downgraded seven other eurozone member states.
The move came just 100 days before the first round of the French presidential election, when Nicolas Sarkozy is expected to seek a second term. The prime minister, François Fillon, said a downgrade had been expected but was badly timed. It was, he added, "an alert that should be neither over-dramatised nor underestimated".
Sarkozy was reported to be furious after the downgrade was confirmed. "To do this in a week when the European markets were getting back to normal … it's worse than pyromaniac firemen, it's seriously perverse," economist Alain Minc, one of Sarkozy's advisers, said. Minc had described the AAA rating as France's "national treasure".
With Europe's leaders gearing up for a crucial summit about the future of the single currency at the end of the month, S&P's decision is likely to undermine the eurozone bailout fund, the European financial stability facility, which could now also lose its AAA rating. That will make foreign investors such as China more nervous about contributing to it.
Europe's policymakers reacted furiously to the downgrade. Internal market commissioner Michel Barnier said he was surprised at the timing of the decision. "In every country, unprecedented efforts are taking place to control public spending," he said in a statement.
The suspension on Friday of negotiations with the banks and hedge funds that hold Greek bonds has also raised fears that the rescue package agreed last year for its stricken economy is set to collapse. Inspectors from the "troika" of Greece's creditors – the ECB, Brussels and the IMF – arrive in Athens this week to decide whether the €130bn bailout should be paid. Without it, Greek leader Lucas Papademos has warned that his country faces bankruptcy.
Erik Britton, of City consultancy Fathom, said the collapse of the Greek talks and the S&P downgrades underlined the severity of the crisis. "The gun is at our heads, and the trigger's being squeezed. If it goes off, it's an absolute catastrophe," he said.
Labour seized on S&P's warning that eurozone austerity policies are jeopardising growth. Shadow chancellor Ed Balls said Osborne "won't listen to ratings agencies telling the eurozone austerity is self defeating".
