The threat of a triple-dip recession in the eurozone poses the biggest risk to the UK and global economy, George Osborne has warned.
Speaking on the sidelines of the International Monetary Fund’s annual meeting, the Chancellor said “serious clouds were gathering on the horizon” for the global economy, and a third recession since the financial crisis for the 18-nation bloc would hit UK growth.
“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,” he said.
Mr Osborne’s comments came amid a slew of poor economic data on Friday that suggested Europe was slowing down. UK construction figures showed that output contracted 3.9pc in August, while French industrial production stagnated and reports emerged that Germany’s central bank would cut its official growth forecast next week.
The gloomy data hit stock markets on Friday. Britain’s benchmark FTSE 100 index fell 1.18pc, or 76 points, to 6,356. while Germany’s DAX index dropped 1.96pc, or 176.7 points, to 8,828.
The Washington-based Fund’s annual healthcheck of the global economy showed the UK would be the fastest growing economy this year, with expected growth of 3.2pc in 2014. However, it downgraded its estimates for the global economy and the eurozone.
The Chancellor said it would be unwise to “rest on my laurels” as the eurozone remained Britain’s single biggest trading partner, and repeated his comments on Thursday that the UK recovery was at a critical juncture.
“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 said Britain was not “powerless when faced with these external risks”. Lowering taxes for business, cutting welfare and encouraging more people into work would ensure the UK remained competitive, he said.
The IMF believes there is around a 40pc chance that the eurozone could slip back into recession over the next year.
Mr Osborne said it was critical that growth in Germany, Europe’s largest economy, remained robust.
“Without the strength of the German economy the European situation would have been a lot worse,” said Mr Osborne.
“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.
However, Mr Osborne said that while he supports proposals by the G20 for governments to support infrastructure initiatives by backing projects led by the private sector, he insisted there was 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,” he said.