When next we hear Gordon the Optimistic making his financial forecasts telling us we are on track for 2% growth, inflation is within targets, and that the UK is better placed than most to weather the financial storm, ask him why the EU think otherwise.
My understanding of the financial rules that govern boom and bust are that 3 consecutive quarters of zero or minus growth = recession. In that case, the UK is in recession, and the bow of the ship of state is pointing south.
The European Commission published its latest interim economic forecasts on 10 September 2008. The basic message
is that fundamentals in the euro area and EU economy as a whole are
sound, but tensions in financial and asset markets, ongoing moderation
of growth in the world economy, the elevated levels of commodity prices
and a widening housing shock are taking a toll: growth in the euro area
and the EU is expected to slow down sharply and inflation is set to
remain higher than usual for some time.
Economic growth is expected to post 1.4% this year in the
European Union (1.3% in the euro area) – around ½ a percentage point
less than forecast in April. The main downside risks identified in the
spring forecast have materialised, with financial turmoil deepening and
reinforcing the ongoing correction in house prices, commodity prices
soaring and fuelling inflation, and the slowdown of global growth
spreading more widely. In a context of an unusually high degree of
uncertainty, the external headwinds not only had a direct adverse
impact on inflation and capital costs, but also an indirect one on
confidence that, in turn, significantly weakened domestic demand in
both the euro area and the EU.
Table 1: Real GDP growth
Note: the quarterly figures are working-day and seasonally adjusted, while the annual figures are unadjusted
Inflation is expected to average 3.8% in the EU and 3.6% in the euro
area this year following the continued strong rise in commodity prices.
This represents an upward revision, although inflation could be at a
turning point as the impact of past increases in energy and food prices
gradually fades in the coming months. The risks to the inflation
outlook are still somewhat tilted to the upside. In particular and even
if economic activity is set to slow sharply, the risk of second-round
effects can not be excluded, although there is no evidence of any
wide-spread such effects so far.
Table 2: Consumer price inflation
The forecast is calculated on the basis of updated projections for
France, Germany, Italy, the Netherlands, Poland, Spain and the United
Kingdom – countries that together account for about 80% of the EU’s GDP.
The United Kingdom – domestic demand contracts as economy comes to a standstill
In the first half of 2008 economic activity in the UK slowed rapidly. In the first quarter growth of real GDP halved to 0.3% QoQ and in the second came to a standstill; after annual growth of 3.1% in 2007, this amounted to a slowdown in year-on-year growth from 2.3% in the first quarter to 1.4% in the second. In both quarters domestic demand contracted, subtracting 0.3% points respectively from quarterly growth.
Consumer spending remained robust in the first quarter but dipped slightly in the second. Fixed investment contracted markedly in both quarters, particularly in the second, thereby substantially dampening growth. A sizeable rebound in inventories compensated for the investment weakness in the second quarter. Imports fell appreciably throughout the first half, against the background of broadly stable exports.
The labour market began to turn: overall employment fell marginally and unemployment increased somewhat in the second quarter. Emerging perceptions of the UK's sharply weaker performance, given its greater exposure to the ongoing weakness in both credit and equity markets, contributed to a further depreciation of the pound sterling. Between February and September this was around 7% on a nominal effective exchange rate basis, bringing total sterling depreciation to 15% since July 2007.
UK policy rates were cut by a cumulative 50 basis points in February and April, but not further, given the sharply worsened inflation performance.
GDP growth in the second half of 2008 is expected to turn negative, with output contracting slightly in each quarter, driven by a continued weakening of domestic demand.
Private consumption 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.
Investment levels are expected to weaken further on account of still-tight credit conditions, an uncertain business environment, both domestic and external, as well as a negative housing market outlook. While the lower exchange rate is likely to support export growth in the medium term, in the short-term weakness in overseas markets will constrain output gains from this source.
Overall, GDP growth for the entire year is forecast to fall to 1.1%, well under half that of the preceding year and more than ½% point weaker than expected in the Commission services' spring 2008 forecast.
The year-on-year HICP inflation rate in July 2008 rose sharply to 4.4%, up from 3.8% in June. Inflation is expected to peak in the third quarter 2008 due to higher gas and electricity prices, and will be lifted by base effects from the previous year.
These inflationary pressures are also evident in high producer price inflation, which reached 10.2% in July 2008, the highest rate in over 25 years.
Average HICP inflation in 2008 is expected to be 3.5%, somewhat higher than forecast in the spring, although inflationary pressures are expected to be progressively mitigated by demand weakness.
Interim forecasts, full text: 
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I think the correct phrase at this time is, 'We are all doomed, doomed I tell you'
