CEBR warns UK may return to recession after period of growth

Published on Monday 16 November 2009 20:20

BRITAIN'S economy risks re- entering recession next year after a "misleadingly strong bounceback" in the closing months of 2009, a well-respected think-tank predicts today.

Releasing its latest "Forecasting Eye" report, the Centre for Economics and Business Research (CEBR) also argues the case for an extension to the reduced 15 per cent VAT rate in an attempt to stimulate consumer demand.

Its projections come after Bank of England economist Andrew Sentance last night warned it was likely to take "five years or maybe more" to get the current government deficit down to "more comfortable proportions".

In a speech to the University of London, the monetary policy committee member said that the "potentially significant impact" of quantitative easing had yet to make its mark on spending by UK households and businesses.

"Normally, I would expect it to take about six to nine months before a change in interest rates begins to significantly affect demand and output in the UK economy," Sentance said.

"And these policy lags are potentially longer and less predictable for the asset purchases we are undertaking under the current programme of quantitative easing."

Recent official data for the third quarter of 2009 showed the economy still mired in recession, defying economists' expectations for a rebound.

The CEBR says the decline in GDP output registered in the third quarter was "at best misleading" and "inconsistent" with recent business surveys and labour market data, adding: "As a result, the Q4 data is likely to record a misleadingly strong bounceback."

And pointing to a probable squeeze on disposable incomes in the new year, the CEBR says the prospects for the start of 2010 "are not so bright".

Douglas McWilliams, the organisation's chief executive, said: "With business investment still on the backburner; government spending stymied by the run-up to the (general] election and no further boost from the end of destocking, it is quite likely that economic growth will stutter in early 2010. A W-shape (recovery] is well within the margins of forecasting error."

VAT is due to head back up to 17.5 per cent at the start of January, but the CEBR says a six-month extension at the reduced rate of 15 per cent would be "clever".

"It will not cost much if it helps sustain consumer spending and will in any case have no significant fiscal cost beyond 2010," McWilliams adds. "And it would move some of the stuttering in the economy to after the election."