UK economy will be in recession by end of this year, says EU

Britain will plunge into recession in the second half of the year as the credit crunch bites, according to European Union forecasts.

A grim report spelled out a range of threats facing the UK economy, including plunging house prices, rising unemployment and stagnating family incomes.

It was the second recession warning from a global body in just one week.

The Organisation for Economic Co-operation and Development last week said Britain has the worst growth outlook of any major economy this year.

The European Commission estimates UK national output will fall 0.2 per cent in both the third and fourth quarters of the year - the first technical recession since the early 1990s.

For the whole of 2008 growth will tumble to 1.1 per cent, below the Commission’s April forecast of 1.7 per cent and well under half last year’s pace.

Germany and Spain are also tipped to suffer back-to-back declines in gross domestic product this year, according to the EU’s predictions. France and Italy will barely grow.

The report warned Britain is particularly vulnerable to the turmoil in world markets given its large banking sector and heavily indebted consumers.

Globally, banks have now been forced to record losses and write-downs of £285 billion, of which nearly £100 billion are within the EU, the report found.

UK firms such as Royal Bank of Scotland and Halifax Bank of Scotland owner HBOS have been among the region’s big losers.

The Commission said: ‘The financial turmoil has now entered its second year. Overall, the situation remains fragile as losses continue to mount and confidence in key financial markets is not yet restored.

‘Private consumption (in Britain) is likely to fall somewhat due to the combined impact of tighter credit conditions for household borrowing, weakening housing and labour markets and inflation-induced stagnation in real disposable income.’

Opposition politicians leaped on the report as further evidence of the unraveling of Gordon Brown’s reputation for economic competence.

Liberal Democrat Shadow Chancellor, Vince Cable said: ‘The European Commission is merely saying something we have all known for a long time.

'With millions of people struggling with massive debts and rising bills it is no surprise that the UK is now headed for recession.

‘Britain is now paying the price for the years in which the Prime Minister allowed the economy to get hopelessly out of control.’

Adding to the alarm about Britain’s economic outlook, an official report showed a huge rise in the cost of imported goods.

The price of imported food and drink rose 22 per cent in July, the most since records began in 1981, the Office for National Statistics said.

This could ignite further inflationary pressures and prevent the Bank of England from trimming interest rates this year from their current 5 per cent level.

Across the full range of products purchased from overseas, prices gained 15.8 per cent - another record.

UK inflation will average 4.4 per cent in the third quarter and 4.3 per cent in the final three months of the year, the EU warned - well above the Bank’s 2 per cent target.

Industry voices claimed that while Britain is suffering, it is wrong to say we are worse off than other major eurozone economies.

David Kern, economic adviser to the British Chambers of Commerce, said: ‘The UK has performed better than the main Eurozone economies so far this year, and it is important to refute misleading impressions that our economy is worse off than the Eurozone.’

But experts said there is no doubting the perilous position Britain finds itself in.

Peter Newland, an economist at investment bank Lehman Brothers, predicted UK economic output will not only fall in the third and fourth quarters of 2008, but in the first three months of 2009 as well.