A eurozone recession poses huge risk to UK and global economy

George Osborne, Chancellor of the Exchequer, has expressed an ominous outlook of the global economy, saying that there are “serious clouds are gathering on the horizon”.

The risk of the eurozone falling into a triple-dip recession poses a huge risk to the UK and global economy, according to Osborne.

The IMF says that the probability of the eurozone slipping back into recession over the next year is around 40%.

Mr Osborne said:

“We have a set of external shocks from the conflicts in the Middle East, the Ukrainian [crisis] to the horrific disease of Ebola in West Africa, which are increasing uncertainty. But most seriously, the biggest risk to the global economy at the moment and certainly the biggest external risk to the UK is the risk of the eurozone falling back into recession and into crisis.”

His comments come following very gloomy reports of European economic data – with growth in the area plummeting – and news that the German central bank will be cutting its official growth forecast next week.

Stocks were hit hard on Friday, with the FTSE 100 index dropping by 1.18%, down to 6,356, and the German DAX index dropping by 1.96%, down to 8,828.

The UK economy has shown signs of strong recovery this year (for the most part) and the Washington-based Fund’s annual healthcheck of the global economy revealed that the UK would be the fastest growing economy this year. However, it has lowered its estimates for the eurozone and global economy.

The Chancellor said:

“We’ve seen the growth forecast not just of Italy and France, but also Germany, cut back this year. Unemployment remains 11pc in the euro area, which is now close to double the UK’s unemployment rate. This is a weak position for these European economies from which to weather further deterioration in our economic performance.”

“The UK is not immune to this turbulence, 40pc of our exports go to the eurozone, and manufacturing [data is] showing output beginning to fall. The British Chambers of Commerce in Britain have warned of a fall in export growth this autumn, and indeed today we’ve got volatile figures on construction in the UK.”

Mr Osborne highlighted how essential it is that growth Germany, the largest economy in Europe, is robust.

“Without the strength of the German economy the European situation would have been a lot worse.”

“Perhaps the issue that gives the greatest cause for concern at the moment are the German data in the sense that we know about the weakness of some of the other economies. Germany has been the exception, and we want it to remain that. But there has been some surprisingly weak German data [and] there’s no doubt that they’ve been more affected than others have been by the situation in Ukraine and resulting sanctions.”

The Chancellor also raised doubts over the IMF’s call for governments to raise public spending on infrastructure, which the Fund claimed would “pay for itself” in the current environment of low borrowing costs.

Mr Osborne is also concerned about the IMF’s aim of increasing public spending on infrastructure, insisting that there is no such thing as “a free lunch”.

“When it comes to investment in capital, I would question whether there is such a thing as a free lunch here. It’s a fashionable theory, often by people who just want to spend more money in all circumstances. Things needs to be paid for, governments have to show they can credibly pay for things, and I’m all for spending more on capital and transport infrastructure, but I think you have to make savings in your budget to afford those,” Osborne concluded.