Grim Forecast

There is a "real risk" of the world's largest economy sliding into recession, officials warned Monday as the latest forecasts out of Brussels showed European Union growth grinding to a halt in 2009 on the back of the global financial crisis.

"Recession is a real risk, for some countries, for the euro area, and for the EU," European Economic and Monetary Affairs Commissioner Joaquin Almunia said.

The overall gross domestic product GDP of the euro zone is expected to grow by only 0.1 percent in 2009 and by 0.9 percent in 2010.

The economy of the 15 nations that use the euro shrank by 0.2 percent in the second quarter of this year and is forecast to contract by 0.1 percent in both the third and fourth quarters.

This would be the first time the euro zone will have entered recession territory since the euro was introduced in 1999.

Europe's engine at a standstill

"The EU economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumer confidence", Almunia said.

As a result, "the European growth engine is at a standstill," he said.

While they make for bleak reading, the EU's 2009 figures are better than those of the United States and Japan, whose economies are expected to shrink by 0.5 per cent and 0.4 per cent respectively.

Jeffery Lacker, Richmond Federal Reserve Bank president, said that in other parts of the world, recession had most certainly kicked in. "I think it's definitely a recession at this point (in the US). How deep, how steep, and long it's going to be is uncertain," he said.

But with officials in Brussels stressing that their predictions are surrounded by "considerable uncertainty and downside risks", Almunia urged member states to rapidly adopt a common recovery program in order to avoid a prolonged period of economic decline.

"National action is needed, and national action is much more efficient when it is coordinated with a common vision and a common discussion on who, when and how should strengthen investment decisions or fiscal policies or structural reforms," Almunia said.

Recession for the UK as others hit zero growth

Of the EU's four biggest economies, Britain is almost certain of facing a full-blown recession in 2009, with its gross domestic product shrinking by 1 per cent. Germany, France and Italy are all expected to post zero growth rates next year.

And with Europe's economic locomotives all grinding to a halt, GDP in the expanding euro zone is set to grow by just 0.1 per cent in 2009 and by 0.9 per cent in 2010.

Among the EU member states expected to feel the full pain of the downturn are its so-called "tiger economies" - Ireland, Estonia and Latvia - which after recording double-digit growth rates over the last five years are now facing a lasting recession.

Spain, the EU's fifth-biggest economy and formerly once of its strongest economic performers, is also set to tip into recession, with its economy shrinking by 0.2 per cent in 2009 before growing by a painfully slow 0.5 per cent in 2010.

New members reacting optimistically

And only among the EU states which joined the bloc in 2004 and 2007 does the economic outlook seem more promising.

Slovakia, which is set to become the 16th country to adopt the euro in 2009, will likely see its economy grow by 4.9 per cent, the best in the bloc ahead of Romania (4.7 per cent) and Bulgaria (4.5 per cent).

Because tax receipts tend to fall - and public spending to increase - during times of crisis, the economic slowdown is also expected to worsen the budget deficits of many EU member states.

France, which has already been cautioned by Almunia, is expected to see its deficit hit the 3 per cent of GDP upper limit this year and to exceed this limit in 2010.

Ireland, meanwhile, is already facing disciplinary action from the EU, with forecasts showing its budget deficit surging to 5.5 per cent of GDP this year and to 7.2 per cent in 2010.

Worst still, the EU's overall budgetary position is also set to deteriorate as a result of the various financial rescue packages being put into place by member states in order to counter the effects of the credit crunch, officials warned.

And with unemployment also set to rise by a full percentage point to 8.1 per cent in 2010, the only good news is likely to come from inflation, which is expected to fall rapidly to 2.5 per cent in 2009 after peaking in 2008.

Banks reveal extent of crunch

The grim economic outlook comes as Europe's top banks revealed how much they were being squeezed of profits by the credit crunch.

Germany's second-biggest bank, Commerzbank, said Monday it had lost 285 million euros and would seek an 8.2 billion euro ($10.5 billion) "stabilization" injection from the government and another 15 billion euro to secure financing.

French bank Societe Generale registered an 83.7 percent drop in third-quarter net profit after being hit hard by the collapse of US lender Lehman Brothers.

Britain's biggest home lender HBOS Plc reported it could lose as much as 5 billion pounds from risky assets and bad loans.