European commission predicts UK recovery in 2013

The European commission on Wednesday forecast that George Osborne is likely to miss one of his key debt targets unless he takes action in next month’s autumn statement – but also predicted that a struggling Britain would be the fastest growing of Europe’s big five economies next year as it pencilled in a further year of stagnation for the austerity-hit nations of the single currency.

With some in the City expecting the Bank of England to announce fresh stimulus measures to boost demand on Thursday, the European commission said a contraction of 0.3% in the UK economy this year would be followed by 0.9% expansion in 2013, reports The Guardian.

The commission said, however, that it expected Germany, France, Italy and Spain to perform even less well than the UK next year, with the 17-nation eurozone eking out expansion of just 0.1% in 2013.

In its regular economic healthcheck on the UK, officials in Brussels said: “The outlook for growth remains very weak in the short term with the main risks to the macroeconomic forecast stemming from weaker-than-expected consumption and investment, and increased turmoil in the euro area.”

The EC added that George Osborne would have to announce new austerity measures in his autumn statement next month to avoid missing one of his two key budgetary targets – to reduce the national debt as a share of the economy by the end of the current parliament in 2015.

“Recent public finance data has been poorer than the Office for Budget Responsibility’s projections, mainly due to lower corporation tax receipts rather than large increases in expenditure, and may overshoot the borrowing target for this financial year if it continues on its current trajectory.”

Despite the 1% increase in GDP recorded in the third quarter of 2012, the City believes the MPC’s decision on Thursday will be tight. Recent business surveys for manufacturing, construction and services have been weak, while data for industrial production and retail sales showed that the strong performance at the time of the Olympics in August has not been sustained.

Howard Archer, chief UK economist with IHS Global Insight, said he expected the Bank eventually to announce a new £50bn round of quantitative easing but would probably hold off until the new year.

“It looks to be an ever closer call and there could very well be a tightly split vote within the monetary policy committee, but the odds look tilted marginally towards the Bank of England holding off from more quantitative easing.”

The commission said the eurozone as a whole would contract by 0.4% this year, markedly worse than the 1.4% growth in 2011. It cut its forecasts for 2013 growth in Germany, France, Italy and Spain as it predicted that unemployment would rise to a fresh peak of 11.8% next year.

“Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time,” said the economic and monetary affairs commissioner, Olli Rehn. “Europe must continue to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth to bring unemployment down from the current unacceptably high levels.”

Brussels blamed the deepening sovereign debt crisis and financial market concerns about a possible breakup of the eurozone for the “disappointing” growth performance in 2012. It said domestic demand would make no contribution to eurozone GDP in 2013 as the lack of jobs and tax increases hit consumer spending.

The commission expressed confidence that by 2014 the benefits of the austerity programmes would bear fruit, leading to expansion of 1.4%.

Although the UK is expected to grow by just 0.9% next year, Brussels believes it will expand more quickly than any of the major economies of the eurozone. The commission has pencilled in growth of 0.8% for Germany, 0.4% for France, a contraction of 0.5% for Italy and a retrenchment of 1.4% for Spain. In all cases the predictions are for output to be weaker than expected by national governments, leading to budget deficit reduction targets being missed.

Greece is one eurozone economy where the commission’s forecasts are less pessimistic than those of the government. The EU executive believes the Greek economy will shrink by 6% this year and 4.2% in 2013 before finally emerging from a six-year slump with growth of 0.6% in 2014. The government is assuming contraction of 6.5% in 2012, 4.5% in 2013 and growth of 0.2% growth in 2014.

Spain is expected to remain the eurozone’s unemployment blackspot, with 26.6% of the workforce jobless in 2013. Greece’s unemployment is forecast to peak at 24%, with another six countries – Ireland, France, Italy, Cyprus, Portugal and Slovakia – having double-digit jobless rates.