Britain ‘to fall into recession’

Many exporters have been hit by the stronger euro

The UK, Germany and Spain will fall into recession in 2008, the European Commission has predicted.

Brussels said the three countries would see two negative quarters of economic growth in a row, which is the technical definition of a recession.

In its latest economic forecast, the commission also downgraded its outlook for eurozone growth again.

It said the 15-nation bloc would now grow by 1.3% this year, against previous projections of 1.7%.

Earlier this month, data showed the region’s economy shrank by 0.2% between April and June – the bloc’s first decline since its creation in 1999.

The contraction was driven by a slowdown in exports and consumer spending.

But high inflation in the region led policy makers at the European Central Bank to keep interest rates at 4.25% at its latest meeting, allowing no relief for the eurozone’s slowing economies.

In its latest report, the commission believed that inflation was now likely to creep up to 3.6% in the eurozone – above its previous predictions of 3.2% and way above the government’s target of 2%.

Gloomy outlook

Shaken by a housing slump and volatile financial markets, the Brussels-based organization predicts that the UK economy, which is not a member of the eurozone, will shrink by an annual rate of 0.2% in each of the next two quarters.

The grim outlook echoes forecasts from the Organization for Economic Cooperation and Development (OECD) out earlier this week, which were even worse.

According to the latest official figures, the UK economy did not grow at all in the second quarter of 2008.

The European Commission said the UK economy would grow by 1.1% in 2008 – much less than the 1.7% previously forecast and a sharp reduction from the official Treasury forecast of 2.5%.

A second quarter of negative growth is also expected in the German and Spanish economies, which are expected to contract by 0.2% and 0.1% respectively.

Stubborn inflation

Economic and Monetary Affairs Commissioner Joaquin Almunia blamed ructions in the financial markets, soaring commodity prices and the housing slump for the gloomy outlook.

“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,” he said.

Stamping out hopes of an interest rate cut in the near term, Mr Almunia said even if economic activity were to slow further, inflation risks were still “tilted to the upside”.

“The risk of second-round effects can not be excluded, although there is no evidence of any widespread such effects so far.”

Sign of the times

Courtesy BBC

As Russia and the West warn of a new Cold War after the Georgian conflict, the BBC’s Humphrey Hawksley in Moscow tries to imagine what it would look like.

A complex network of narrow tunnels broke out into vast, high-ceilinged chambers with the sides curved cylindrically like the hull of a ship

Evgenia Evlenteva strode past a row of old radiation suits hanging on pegs like raincoats.

With a bounce in her step and a torch stuck into her jeans back pocket, she asked: “Right, it’s more than 60 metres (200ft) deep so do you want to take the stairs or the lift?

“Oh and by the way, the door weighs three tonnes. It’s made of lead and metal, and it still works.”

She jabbed a button and, with a groan and a creak, a huge slab slid back and let us into one of Moscow’s key Cold War nuclear bunkers.

It was decked out with its own air, water and food supplies for 2,500 people, should the city have come under nuclear attack.

With Russia and the West now exchanging accusations about starting a new Cold War, it seemed a good place to go, once hidden in a leafy street near the Moscow River and just off Taganskaya Square, where it linked up to the Metro station so the top brass and supplies could get in there.

International crisis

I found out later that, at the same time as our small tour group was taking the stairs down, Russia was testing an intercontinental ballistic missile from its recently modernized Topol system, more than capable of reaching Washington.

Topol missiles during rehearsals for Russia’s annual Victory Day parade

Over the past couple of weeks, each day it has seemed either Russia or the West was ratcheting up the stakes, as if both sides were relieved to get away from the insoluble nihilism of Islamist terror and work on something that they could get their teeth into.

Russia spoke of tensions resembling the eve of World War I. Britain’s Foreign Secretary David Miliband said that this international crisis marked a clear end to the relative calm enjoyed by Europe since the Cold War finished.

But it has been difficult to reconcile this exchange of apprehensions with snapshots here, where the bus stops are decorated with posters for the new Batman movie, hoardings advertise global brand-name products and you sweep out of a ring-road tunnel towards a skyline of cranes putting up new high-rise office blocks to keep up with Russia’s high economic growth.

No longer isolated

From the mobile phones, to the makes of cars, to the news-stand Russian editions of the celebrity magazine Hello!, it is pretty impossible to envisage how a new Cold War would actually work.

It’s no longer safe down here from a nuclear attack… The bombs are too big now. It’s not deep enough Evgenia Evlenteva, Moscow bunker guide

Boeing, for example, has a huge factory outside Moscow. Russia’s Gazprom, the conglomerate much feared for its ability to turn on and off Europe’s gas supplies, is one of the biggest companies listed on international stock exchanges.

And would some Western package of punitive sanctions mean that the Russian billionaire Roman Abramovich would have to sell Chelsea Football Club?

In the last Cold War, Russians were seen as isolated behind their Iron Curtain, with their own ropey technology and a grim-faced population oppressed by secretive monosyllabic leaders.

Now you can barely stop them talking, as they ferry between 24-hour news channel chat shows.

As we finished our climb down the stairs, Evgenia snapped on the lights to the bunker.

It was a complex network of narrow tunnels that broke out into vast, high-ceilinged chambers with the sides curved cylindrically like the hull of a ship, made of reinforced lead and concrete.

The museum had put in telex machines, old telephones, maps and wooden desks to show what it had looked like.

Present-day thinking

Evgenia ushered us into a lecture hall for a video briefing, where I got perhaps a glimpse of Russia’s present-day thinking.

Black and white film drawn from once-classified Soviet archives began by naming America as the only nation that had ever used a nuclear weapon in conflict, and telling how the Soviet Union was forced to catch up to protect what it called its “sphere of influence”.

The 1962 Cuban missile conflict was a brilliant piece of brinkmanship that re-defined Russia’s global power.

The collapse of the Soviet Union was a tragedy. The motif of the film was nuclear tests, exploding into bigger and bigger mushroom clouds, both Russian and American.

New bunkers

“So,” I asked Evgenia, when it is finished, “will you be re-opening this bunker for the new Cold War?”

She pushed back her dark hair and creased her brow in confusion. She would have only been a child when the last one ended.

“No, why?” she said. “Who wants that? What family wants that – that you could be blown up at any moment? Why would anyone want to go there again?”

Then, as we set off towards the next tunnel, Evgenia came up to me and said:

“But it’s no longer safe down here from a nuclear attack, you know. The bombs are too big now. It’s not deep enough.

“We have new bunkers in Moscow, though. Maybe 100 metres deep, I don’t know.

They’re still secret and I’m not allowed to go there.”