New recession threat to Britain as euro zone goes into a downturn

Fears that Britain will be hit by recession grew today after it emerged Europe's economy has shrunk for the first time in more than a decade.

Germany's economy suffered the biggest blow, contracting 0.5 per cent in the three months to June. GDP in France and Italy was down 0.3 per cent.

The 15 eurozone economies shrank 0.2 per cent as a whole, the first fall since 1995.

For the EU's 27 nations, including Britain, GDP was down 0.1 per cent.

The figures come 24 hours after Bank of England governor Mervyn King made it clear Britain could be heading for recession.

Today, Vince Cable, Liberal Democrat Treasury spokesman, said: 'These figures increase the likelihood Britain's slow growth will turn into recession, since the eurozone is our biggest trading partner.

'The only positive is that the slowdown in the western world is taking pressure off oil prices.'

The figures from Eurostat showed Germany was on the brink of a recession, which is officially two consecutive periods of economic decline.

The European downturn was largely driven by a decline in exports and consumer spending. Economists were gloomy about the possibility it would be short-lived.

'One cannot talk about a soft landing of the eurozone,' said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt.

'This is a cyclical downturn, which tends to be a long haul.'

Inflation in Britain, at 4.4 per cent, was higher than the European average of four per cent.

The pound also fell against the dollar and the euro after the Bank of England's inflation report.

Shadow Treasury minister Philip Hammond said: 'Even with this bad news from the eurozone, international investors have lost confidence in the UK and the pound has fallen against the euro.

'This is one reason why inflation is now higher in the UK than the euro zone. Gordon Brown's economic incompetence is hitting families in the pocket.'

London business leaders today urged Chancellor Alistair Darling not to dither over acting to prop up Britain's economy.

They called on him to support the property market after the fiasco over a possible stamp duty 'holiday', which estate agents say has hit house sales.

The Chancellor should also be ready to extend the £50 billion special liquidity scheme for banks and building societies, said the business leaders.

John Dickie, director of strategy and policy at London First, said: 'The capital is the engine of the UK economy. Action is needed now to keep the engine running.'

He said ministers should press on with infrastructure schemes including Tube renewal, the East London Line extension and Crossrail.

The business group backed the idea of town halls buying out existing mortgages from homeowners who could no longer pay their bills.