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EU deals blow to Darling's hopes for rapid recovery; Commission's forecast below UK estimates.

Byline: RUSSELL LYNCH

CHANCELLOR Alistair Darling's hopes of a rapid recovery for the UK's recession-blighted economy have been dealt another blow by gloomy new European forecasts.

The European Commission downgraded its UK forecasts for this year and next - expecting output to shrink by 3.8% in 2009 before edging just 0.1% ahead in 2010.

The Commission's view of a "gradual return to slight positive growth by late 2010"contrasts with Mr Darling's more optimistic forecast of 1.25% growth next year, presented in April's Budget.

Its forecasts say "the likelihood that economic activity in 2010 will be weaker than envisaged by the UK authorities" will add to a "very significant" deterioration in the public finances.

UK unemployment is also set to rise to around 10% of the workforce - some 3m people - by late 2010, the Commission said.

"The UK economy is now clearly experiencing one of its worst recessions in recent history, in the context of the global financial and economic crisis," it added.

Mr Darling announced an extra pounds 700bn in borrowing over the next five years to plug the gap in the public finances as tax receipts plunge and spending on unemployment benefits and stimulus measures rises.

Lower tax take from previously booming areas such as the housing and financial sector - as well as the lower level of economic activity - could push the Gover nment's debts as a share of output "close to 85%" by 2010/11, the Commission added.

The overall report says the 27- nation EU and the 16 countries that use the euro currency will shrink 4% this year - far ahead of its previous forecasts.

It says some 8.5m jobs will disappear in the EU in 2009 and 2010, more than wiping out the number of new jobs created in the last two years.

It predicts a subdued recovery next year, but only if the banking sector and world trade start to r ecover..

According to the Commission, other eurozone countries will be even harder hit than the UK this year, with Germany's economy contracting by 5.4% and Italy's by 4.4%.

Ireland's crisis-hit economy is forecast to shrink by 9% this year..

UK companies remain more confident than their European counterparts that the worst of the recession is over

BUSINESSES in the UK increasingly believe that the country will avoid a period of deflation, and rising confidence suggests the worst of the recession could be over, a report out today revealed.

An index of UK companies' optimism showed it has risen from 89.9 in January to 91.2 in April, according to research by accountants and business advisors BDO Stoy Hayward.

The index, which measures medium-term business confidence, suggests the recession has troughed in both the UK and Eurozone and that the pace of the slowdown will diminish.

In their Eurozone Business Trends report, the organisation found that businesses in the UK were also far more confident that deflation could be avoided than their European counterparts.

The UK inflation index, which measures expected inflationary pressures over the next three months, shows concerns about deflation have receded, with a rise from 86.6 in January to 91.5 in April. In contrast, the index for Eurozone businesses plummeted from 97.1 in January to an all-time low of 88.4 in April, which BDO said showed firms "are now clearly very concerned about the risk of deflation".

In the UK, the official Consumer Prices Index (CPI) measure is still well above the Government's 2% target.

Figures for March showed it had dropped to 2.9%, having unexpectedly risen the previous month to 3.2%.

The Bank of England has slashed interest rates in recent months to a record low of 0.5% and begun a programme of quantitative easing in which pounds 75bn is being injected into the economy.

In contrast, the European Central Bank (ECB) has cut the cost of borrowing at a more modest rate. Both institutions will meet this week to set rates for the month, and experts predict that, while the BoE will not make a change, the ECB will be forced to cut its rates to a record low of 1%..

CAPTION(S):

Euro blow - Chancellor Alistair Darling outside the EU Council building, in Brussels, earlier this year Picture: VIRGINIA MAYO
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Publication:Daily Post (Liverpool, England)
Date:May 5, 2009
Words:715
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