Downturn might be easing but more jobs pain on the way, report warns

Published on Saturday 18 April 2009 14:08

THE worst economic conditions may well be over as markets stabilise and credit conditions ease, according to a report to be published tomorrow.

The Ernst & Young Item Club spring forecast will say the economy is no longer in freefall.

However, it expects GDP to contract by 3.5% this year and 0.1% in 2010. It will conclude that recovery next spring is now the most likely scenario. Peter Spencer, chief economic adviser to the Item Club, will explain that this does not mean the UK economy is out of the woods yet.

"Although one or two positive signs have started to appear, we face another 12 to 18 months of serious grief. Around 900,000 jobs will be lost this year and half a million next.

"Consumption will fall by nearly 4% over this period as people worry increasingly about job security," he says. While Scotland has so far dodged the worst of the fallout in the labour market, there is little hope of avoiding a sharp fall in employment and consequent rise in unemployment over the next two years, the report will warn.

The stabilisation of the banking system and the revival of the corporate bond market in January have allowed the UK's strongest companies to side-step the credit crunch and gain access to credit, albeit at high rates.

The subsequent rise in equities and the commodity markets in the past month and the improved sentiment in business surveys in the US, China and especially the UK have also encouraged the belief that the worst of this recession is now behind us, the report will say.

Spencer says: "This recession is unusual in terms of the degree of monetary and financial stimulus that has been applied. The whole kitchen sink has been thrown at the problem – whereas normally monetary policy would have to be tightened to bring down inflation.

"That is why I believe the hopeful signs seen in recent weeks mark a turning point rather than the false dawn that appeared so cruelly in 1931."

However, even if this relatively optimistic scenario plays out as the Item club anticipates, there is still a rocky road ahead. As well as the bad news on the employment front, it will predict a housing market and a high street in the doldrums for the next 12 months.

World trade has fallen off a cliff since last September and will decline by 9% in 2009, depressing the global economy.

The E&Y report will say that UK monetary policy is now in overdrive. The Monetary Policy Committee has cut the Bank base six times since last October to a historic low of 0.5%. Last month the Bank of England began the process of quantitative easing.

Spencer says: "So far at least the signs are positive that the MPC's aggressive policies are working.

"The latest credit conditions survey by the Bank of England showed a net improvement in corporate credit availability."

However, the International Monetary Fund warned last week that recovery from the global economic downturn was likely to be "slow and weak".