EU economic growth seen at a standstill in 2009

The eurozone is already in a technical recession and economic growth will come to a virtual standstill next year, the European Commission said yesterday, calling for coordinated action to support growth.

"EU economies are strongly affected by the financial crisis, which is aggravating housing-market correction in several economies at a time when external demand is fading rapidly," the EU executive arm said.

"While the important measures taken to stabilise financial markets have begun to restore confidence, the situation remains precarious and the risks to the forecasts significant," it said in its twice-yearly economic forecasts.

Economic growth in the 15 countries using the euro will slow to 0.1 per cent next year from 1.2 per cent expected this year, the Commission said. It forecast 0.9 per cent growth for 2010.

"We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector," Economic and Monetary Affairs Commissioner Joaquin Almunia said in a statement.

The Commission said it expected GDP to decline in the third quarter of last year in both the EU as a whole and the euro area. Since eurozone gross domestic product shrank in the second quarter as well, this would add up to two consecutive quarters of negative growth - a definition of a technical recession.

"The outlook remains bleak further ahead, with several of the EU economies in or close to a recession," the Commission said.

"A relatively moderate, 50-basis point, further increase in risk premium and a tightening of credit availability for households, not any longer a remote possibility, can trigger an outright recession - a decline of one per cent in GDP next year - in the euro area," the Commission said.

The Commission expects that the eurozone's three biggest economies, Germany, France and Italy, will not grow at all next year while the economies of Ireland and Spain will contract.

This is still better than the outlook for the US, where the economy is set to shrink 0.5 per cent next year. The Commission expects Japan to contract 0.4 per cent in 2009.

In the EU-27, Britain's economy will shrink one per cent next year, the Baltic states of Estonia and Latvia will contract this year, and next and Lithuania will shrink in 2010, the forecasts showed.

Eurozone inflation is likely to slow to 2.2 per cent next year from 3.5 per cent seen this year and decelerate further to 2.1 per cent in 2010, the Commission forecast.

The European Central Bank wants to keep inflation below, but close to two per cent, but consumer-price growth was boosted by surging oil and food prices in the 12 months to the middle of this year.

"The recent strong decline in commodity prices, together with a marked weakening of the growth outlook and a related easing of the labour-market situation, reduces markedly the risk of second-round effects," the Commission said.