Portugal headed for deep 2012 recession

Portugal is likely to suffer a worse-than-expected recession next year despite the government's progress towards meeting its budget deficit targets, the European Commission said today. Meanwhile Italy announced that its economy contracted in the third quarter making recession almost certain, and eurozone banks revealed their funding pressures by rushing to snap up cheap loans offered by the European Central Bank.

Following its second review of Portugal since its €70bn bail-out in the spring, the commission said growth figures this year were better than predicted – but warned of a deeper than forecast recession in 2012. In a statement, the commission said gross domestic product would contract by 3 per cent next year before recovering "at a gradual pace". It added that the if the "ambitious" budget set for next year were implemented, the deficit target of 4.5 per cent of GDP remained attainable. Portugal is due to receive the next €5.3bn of bail-out loans in January.

The Italian economy contracted 0.2 per cent in the third quarter – in contrast with 0.3 per cent growth in quarter two. Consumer spending, investment and imports were also down. If a recession were confirmed it would be the fifth since 2001. Prime Minister Mari Monti has said he aims to balance the country's budget by 2013, and is currently pushing through parliament a €30bn package of austerity measures – Italy's third of 2011.

With the threat of a credit crunch hanging over the eurozone, 523 banks took advantage of the ECB's offer of cheap three-year loans – a strategy designed to quickly inject liquidity into the system. In total banks borrowed €489bn, significantly more than analysts had predicted. The loans were pegged to the ECB's main 1 per cent interest rate. Markets enjoyed a bounce on the announcement but it was short-lived as Italian and Spanish bond yields rose, and this afternoon the main European stock markets had made gains of less than 1 per cent.

There was more gloomy economic news as Eurostat published a flash estimate of its consumer confidence index for December, down to -21.2 from -20.4 in November. Howard Archer, chief European and UK economist at IHS Global Insight said: "The further drop in eurozone consumer confidence to a 26-month low in December bodes ill for consumer spending, which fuels recession fears especially given that that consumer spending accounts for around 55 per cent of eurozone GDP. In fact, December marked the fifth successive decline in eurozone consumer confidence and it was disappointing that the rate of decline picked up from November."

In Brussels, Herman Van Rompuy announced that European Union leaders would hold a summit on January 30. In a video message, the president of the European Council said: "I'm preparing this meeting intensively. It will be focused on jobs, and that's a big challenge in a context of zero growth expected in most of our economies. In some of them there will even be a recession. We must take strong action on employment.

"Bringing financial stability to the eurozone remains absolutely key for our future. We have taken major decisions this year to overcome the sovereign debt crisis." He added: "It is a joint effort. The path is long; longer than we expected – but let there be no doubt, there is a fundamental political will to move forward as a union, respecting fully each other's situation." He said leaders had a "moral duty" to their fellow Europeans to solve the crisis.