Gloom looms as euro hopes dashed

Markets fell sharply after ECB president Mario Draghi dashed hopes that he would signal an imminent move into bond markets to ease Spain’s borrowing costs.

Doubt over the future of the euro has already deepened the UK’s double-dip recession, with output plummeting 0.7 per cent in the second quarter of 2012.

Now further gloom has been forecast by a thinktank which predicts the country’s GDP will shrink by 0.5 per cent overall in 2012.

The National Institute of Economic and Social Research (Niesr) also downgraded its forecast for UK growth in 2013 from 2 per cent to 1.3 per cent.

Niesr said if Chancellor George Osborne had waited to introduce his deficit-reduction package of cuts and tax rises until 2014, when the recovery that began in 2010 would have been “well under way”, he could have avoided this year’s double-dip recession.

A report by the thinktank’s experts found the decision to implement austerity straight away may have cost the country a total of 16.5 per cent in GDP growth over a decade – the equivalent of £239bn in 2010 prices.

David Cameron yesterday defended the Chancellor, who has already come under fire after last week’s woeful growth figures, with some Tories and Lib Dems echoing Labour’s calls for him to be stripped of his role.

The Prime Minister said: “George Osborne is doing an excellent job in very difficult circumstances and he has my full support.”

Asked if he would still be the Chancellor at the next Election, Mr Cameron replied: “He’s not going anywhere – yes.”

The Bank of England policymakers announced no extra help for the UK economy yesterday.

The monetary policy committee had considered cutting rates below the current 0.5 per cent but voted to keep them on hold and maintain its quantitative easing scheme at £375bn. The Bank’s main concern over a rate cut beyond 0.5 per cent is the impact it could have on some banks’ and building societies’ ability to lend.

Anna Leach, the CBI’s head of economic analysis, said the new £80bn Funding for Lending scheme should offer some support to struggling businesses.

“However, the outlook for the UK economy remains fragile, particularly in light of the disappointing official data for the first half of the year and the recent slowdown in global momentum,” she said.

The ECB also kept its main interest rate on hold at 0.75 per cent.

Hopes of new measures were stoked a week ago when Mr Draghi said he would do whatever it takes to save the euro.

Many had expected the bank to resume bond-buying to keep a lid on Spain and Italy’s borrowing costs but while he offered some hope by saying the ECB stood ready to intervene in bond markets, insisting the euro currency was irreversible, traders had hoped for actions rather than words.

The FTSE 100 index lost earlier gains to stand 0.5 per cent lower at one stage yesterday, while the stock market tumbles were even more pronounced in Europe, where Germany’s Dax and France’s Cac-40 were down by more than one per cent.

The euro fell while Spain’s borrowing costs, which had dropped in recent days, pushed back up to the seven per cent danger mark.

CMC Markets analyst Colin Cieszynski said: “With stock markets moving into their weakest two months of the year and no significant developments scheduled until the very end of the month, markets could spend much of August under pressure again.”

Comment: Page 14; Market report: Business, Page 19.