Europe revises down British growth forecast

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The European Commission has revised down its forecast for British growth this
year, but kept its predictions for the European Union unchanged despite the
mounting Greece debt crisis.

In its interim forecasts for 2010, the Commission changed its predictions for
GDP growth from 0.9 per cent to 0.6 per cent.

It also predicted that inflation would jump to 2.4 per cent this year, after a
forecast last autumn of 1.4 per cent.

Olli Rehn, the EU's Economic and Monetary Affairs Commissioner, said: "The
UK stands out as the only large member state for which growth has been
revised downwards."

He highlighted two factors — the end of the lower VAT rate, which returned to
17.5 per cent from 15.5 per cent, and a loss of momentum seen in the fourth
quarter.

In an accompanying report, the Commission said: "The impact of the
January 2010 reversal of the VAT cut and poor January weather are likely to
depress private consumption in the first quarter."

Mr Rehn said: "The forecasts are a bit like today's weather in Brussels.
We have some bright and light elements emerging but there are still some
quite dark clouds. Perhaps by the spring forecast in May we will have
stronger and brighter elements.

"The longest and deepest recession in the history of the EU ended in the
third quarter of last year... Looking ahead gives us a mixed picture and
uncertainty remains in the financial markets."

The figures will be seen as another blow to the British economy, which has
suffered several setbacks in recent weeks, and have emerged before revised
GDP data is released tomorrow.

During the fourth quarter, Britain narrowly emerged from recession with GDP
growth of 0.1 per cent but there are hopes that tomorrow's revision will
show output increased by 0.2 per cent.

However, a steep decline in business investment in the fourth quarter has
deepened fears that the UK could fall back into recession.

The Commission expects British GDP to grow by 0.2 per cent in the first and
second quarter of this year, before rising by 0.3 per cent between July and
September and reaching 0.4 per cent in the final three months of 2010.

Meanwhile, the Commission left its predictions for the European Union
unchanged at 0.7 per cent this year.

Concern about Greece’s ability to finance its deficit and debt has roiled
financial markets since the Government there revealed that it had a budget
shortfall of 12.7 per cent of GDP last year, more than four times the limit
allowed for countries using the euro and the highest in the 27-nation Union.

Olivier Blanchard, the chief economist of the International Monetary Fund
(IMF), warned this week that belt-tightening in Europe would be “extremely
painful” and that it could take up to 20 years to pay off its deficit.

However, the Commission said that its budget forecast remained “broadly
unchanged” from its November assessment, when it projected that the region’s
deficit would widen to 6.9 per cent of GDP in 2010.

The Commission said in its statement that, although better-than-expected
global demand could further spur exports, investment remained very weak.

"With many of the main driving forces being still temporary in the EU and
globally, the robustness of the recovery is yet to be tested," the statement
read.

"A muted outlook for investment typically implies a weak labour market ahead,
which in turn is likely to dampen private consumption."

It added: "On the upside, the vigour of the global recovery, particularly
in Asian emerging markets, and the imminent turning of the inventory cycle
in the EU may have a greater impact on domestic demand than currently
anticipated."

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