THE eurozone is on the brink of recession, according to bleak new figures that underscore the diverging economic prospects of the UK and the Continent.

On the day that Gordon Brown set June 9 as the publication date of his euro assessment, official statistics showed that Italy, Germany and the Netherlands all saw their economies contract in the first three months of the year. In the eurozone as a whole, growth ground to a halt.

In Britain, by contrast, the outlook for growth is far brighter. According to the Bank of England, the economy is set to receive a sizeable boost from the recent fall in the pound.

Presenting the Bank’s quarterly Inflation Report, Mervyn King, the Governor-designate, said: “The recovery in net trade from the fall in the exchange rate stimulates stronger growth further ahead. A key implication of this fall in the exchange rate is that it should enable the economy to become less unbalanced.”

The Bank’s cheerier-than-expected assessment helped the FTSE 100 index to close up 36.1 points at 4,011.1 — the market’s highest close this year. The pound also rallied, ending London trade at 70.7p against the euro, more than a penny above its record low. Mr King said that, although growth in the next three months would be lower than the Bank had forecast in February, the weak pound would trigger a marked pick-up in the economy later this year.

By the end of 2003 the annual growth rate will be approaching 3 per cent, the Bank’s forecasts showed. Growth will then fall back to about 2.5 per cent in 2004, below the optimistic 3 per cent to 3.5 per cent forecast by Gordon Brown.

The weak pound and higher council tax means inflation will stay above the Bank’s 2.5 per cent target for much of 2003 before easing back next year. But Mr King said the inflationary impact of the weak pound was unlikely to be as large as in previous currency falls, leaving the door open for interest rate cuts if growth disappoints.

He added: “Output growth in the euro-area remains weak and shows little sign of recovery. The sharp rise in the value of the euro will dampen growth prospects.”

Figures released yesterday by Eurostat, Europe’s official statistics agency, showed that GDP in the eurozone failed to grow at all in this year’s first three months. Germany’s economy contracted by 0.2 per cent and the Italian economy by 0.1 per cent. The Netherlands fell into outright recession as activity shrank by 0.3 per cent.