Germany and France to Stagnate, Britain to Go Into Recession

The European Commission recently forecast that the economy in the 15 countries that use the euro may already be in a recession and will barely grow next year, expanding just 0.1% as the financial crisis hits hard. The currency zone's largest economies will come to a standstill or shrink next year, it said in its latest economic outlook, with Germany, France and Italy not growing at all at 0.0%. Ireland and Spain will see output fall and jobless lines and government deficits swell, the EU execs said. Among EU members that not using the euro, Britain's economy will slip into recession with minus 1% growth, as Baltic states Estonia and Latvia will also see negative growth. The euro economy may already be experiencing a technical recession by shrinking for 2 quarters in a row, the EU warned. It predicted negative quarterly growth of 0.1% in the 3rd and 4th-Q, after contracting 0.2% in the 2nd-Q. Germany's expected to set out a program of public spending and tax breaks to boost investment and create jobs and France has called for industry to receive state help to ride out the slowdown. The 27-member European Union warned that things may get even worse as forecasters could not rule out a deeper credit crunch that would brake the economy, strain government finances and put a near-freeze on household spending. Even slightly higher costs for borrowing, an extra risk premium of 0.5 % on interest rates, would tighten credit available to households and can "trigger an outright recession, a decline of 1 % of GDP in the euro area," it said. The labor market should deteriorate sharply next year, the EU forecast said, with unemployment in the euro-zone climbing to 8.4% in 2009 from a decade-low 7% at the end of 2007. This will see an extra 2 million people out of work in the euro area. Spain will see the worst of this as a housing bubble bursts and tourism slows. The jobless rate may shoot up to 15.5% in 2010 from 10.8% 2008, the EU says. EU economists said the outlook for the euro area and the wider 27-nation EU "remains bleak" with growth only recovering gradually toward the end of next year as exports start to pick up. It says the euro area will grow 1.2% for the entire year, 0.1% next year and 0.9% in 2010. It forecast EU GDP this year at 1.4%, falling to 0.2% in 2009 and 1.1% in 2010. The only silver lining it picks out is a slide in inflation, down from record highs to an average of 2.2% next year as oil prices cool swiftly. This may increase the amount of money people have to spend but they may be less likely to shop if they fear job losses. Private consumption is nearly stagnant, it says. The high value of the currency has dampened exports to the U.S., the EU's main trading partner. Oil prices should fall from a 2908 average of US$104 a barrel to US$86 next year, the EU says. But food and metal prices will probably stay at high levels. The cost of bailing out troubled banks while tax revenues shrink and welfare payouts swell will see governments pile on debt and run bigger deficits, the EU exec warns. It says France and Ireland will break EU budget rules in 2009 by running a yearly government deficit of over 3% of GDP. The ceiling is intended to keep their shared currency stable. Britain, Latvia, Lithuania, Romania and Hungary will also likely exceed the limit.