The global financial crisis is pushing the whole European Union into recession, official forecasts said on Monday as South Korea unveiled its own $8,5-billion stimulus package against the turmoil.
The European Commission forecast a short shallow recession for the 27-nation EU, predicting the bloc’s combined economy would shrink 0,1% in both the third and fourth quarters of 2008.
“The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumer confidence,” said EU economic affairs commissioner Joaquin Almunia.
The economy of the 15 nations that use the euro shrank 0,2 in the second quarter and is set to contract by 0,1% in both the third and fourth quarters, according to forecasts by the EU’s executive arm.
It is the first time that the eurozone has slumped into recession — which economists broadly define as two consecutive quarters of economic contraction — since the single currency was introduced in 1999.
In the face of sharply slowing growth, the commission forecast unemployment would return as a major headache after a steady decline in recent years.
It predicted that the unemployment rate in the eurozone would creep up from a record low of 7,2% in March to 8,7% in 2010.
Despite the grim forecast, Europe’s main stock markets rose at the start of the working week, with London’s FTSE 100 index up 0,87% in early trade.
Frankfurt’s DAX 30 advanced 1,32% while in Paris the CAC 40 gained 0,74%.
The European markets tracked similar gains in Asia, where Hong Kong’s Hang Seng index closed 2,7% higher and Australian shares rose 5,06% by close.
The Tokyo market was closed for a public holiday.
Analysts said the markets were closely watching the leadup to Tuesday’s US presidential election, with polls giving Democrat Barack Obama a sharp edge over Republican John McCain.
“We expect the new US president will become an integral force in policymaking even before his official inauguration in January,” said Bank of America chief economist Mickey Levy.
But despite the rises on the stock markets, fears of recession loomed large, with South Korea unveiling a stimulus package to cushion the blow of the financial crisis.
The Seoul government, saying it expected a significant slowdown in exports, promised an extra 11 trillion won ($8,5-billion) in spending next year as well as tax cuts of three trillion won to boost sagging domestic demand.
The strategy and finance ministry said the prospects of a swift turnaround in the global financial turmoil appeared dim, and reduced its economic growth forecast for 2009 to around four percent from close to five percent.
The turmoil that started out in the US subprime mortgage credit crunch “is causing concern over a global economic downturn,” the minister of strategy and finance, Kang Man-Soo, told reporters.
South Korea’s KOSPI index ended the day up 1,5% on the package.
Separately, Chinese Prime Minister Wen Jiabao said China would take a hit from the crisis and that inflation remained a serious challenge.
“The global financial turmoil and the economic downturn are getting worse,” Wen wrote in a signed article in Qiushi, a journal published by the Communist Party.
“Inflationary pressure remains large as the world oil price is still at a high level despite some corrections. All these negative factors have affected and will continue to affect China.”
China’s growth slowed to nine percent in the third quarter of this year — the lowest quarterly figure since the second quarter of 2003. – AFP