Eurozone 'close to recession'

Special report: global recession

Mark Tran Thursday July 19, 2001

One day after Alan Greenspan, the chairman of the Federal Reserve Board, spelt out the fragile state of the American economy, a British thinktank today warned that the eurozone is perilously close to entering recession this year. In its latest report, the Centre for Economics and Business Research (CEBR) in London, an independent thinktank, estimates that the eurozone's economic growth will stall during the second half of 2001, while Germany, Europe's leading economy, may already be in a technical recession.

Its report came as the European central bank announced that it would leave interest rates unchanged at 4.5%. Few economists had expected a cut this week after the ECB president, Wim Duisenberg, had said two weeks ago that rate levels were "appropriate for some time to come".

The report underlines the dangers facing the global economy, with two of its most important regions providing little impetus for world growth. The CEBR said that the eurozone could even come close to delivering two consecutive quarters of negative growth - the technical definition of a recession.

Germany, Europe's largest economy, is likely to have shown negative growth in the second quarter of 2001, while growth for the third quarter is predicted to be close to zero and possibly negative - suggesting it may even be in technical recession at present, according to the CEBR.

Yesterday, Mr Greenspan provided little cheer for investors, saying that the sharp downturn in the US economy is likely to continue, with limited signs of improvement. The Fed chairman listed a raft of concerns, including weakness in capital spending, the international slowdown and deterioration in consumer spending.

The new CEBR forecast indicates that Europe is poorly placed to pick up the slack as the American economy falters. Its report comes on the day the European central bank is set to announce its interest rate decision, with analysts predicting that the cost of borrowing will stay on hold at 4.5%.

Douglas McWilliams, CEBR chief executive and author of the report, said: "The bank can't move either way at present. Eurozone inflation has fallen from its 3.4% peak, but with the phasing out of national currencies likely to lead to price rises, inflation is likely to stay above the Bank's target of 2% until 2003. So it is difficult to cut rates.

"But at the same time, with growth stalling and European unemployment starting to rise, there will be substantial pressure on the bank to take some action to boost demand."

With weakness in the main economies around the world - Japan is also limping along - analysts are gloomy.

Allen Sinai, an economic forecaster with US thinktank Decision Economics, said: "This is a serious contagion that left to its own dynamics, could become a vicious cycle that feeds on itself." He puts the odds of a global recession at 40%.

The strains on the international economy will put special pressure on the G8 group of world leaders when they meet at the Genoa summit in Italy this Friday. Political issues have had a tendency to overshadow economic ones, but for once economics are set to dominate the agenda.

http://www.guardian.co.uk/business/story/0,3604,524174,00.html

-- Martin Thompson (mthom1927@aol.com), July 19, 2001