Forecasts of economic woe just seem to get gloomier every day

Published on Friday 26 December 2008 20:04

TWO of the gloomiest forecasts yet for the UK economy were released yesterday as experts predicted a further decline in consumer spending and a slump in business investment.

Independent think-tank the Centre for Economics and Business Research (CEBR) forecasts that GDP will shrink by 2.9 per cent in real terms in 2009 in the starkest warning yet for the economy.

Economists from the group said business investment was set to plummet by 15 per cent as companies scale back their spending and get further squeezed by the banks.

And IHS Global Insight downgraded its expectations, saying it expected GDP to drop by 2.7 per cent next year – with a risk of a 3 per cent fall – and added that a zero per cent interest rate was "very possible".

The figures far exceed official Treasury forecasts that the economy will shrink by between 0.75 per cent and 1.25 per cent next year, with the UK returning to growth in the second half of 2009 – and forecasts earlier this week from Capital Economics which expects GDP to drop by 2.5 per cent. Even that scale of decline would mark the worst annualised decrease since official records began in 1948.

The latest estimates also cast gloom upon the housing market, employment levels and exports.

Howard Archer, chief UK economist at IHS Global Insight, warned that he expected house prices to slump by a further 15 per cent over the course of next year. He added that business investment would "decline substantially", while he expected consumer spending to drop by 2 per cent.

He said: "We consider there to be significant downside risks to these forecasts as the global economy is facing its most serious recession since the Second World War.

" Indeed, it is possible that the UK economy could contract by more than 3 per cent in 2009 and see further contraction overall in 2010."

But Archer added that he thought interest rates could slip to 0.5 per cent, from the current 2 per cent, and said that while the pound will continue to lose value in the short term, it was near to "bottoming out".

And he said that the UK was likely to experience a period of deflation in 2009, despite November's inflation figure registering 4.1 per cent – twice the Bank of England's target level.

Economist Charles Davis, one of the authors of CEBR's United Kingdom Prospects Report, said that, while consumer spending in 2009 was likely to fall by 1.8 per cent, it was business investment which would take the worst hit.

He said: "The United Kingdom economy has deteriorated significantly in the second half of 2008 but 2009 is where we are likely to see the real economic pain, with output falling by 1.3 per cent in the second quarter and a full-year contraction of 2.9 per cent.

"The economy is facing a painful readjustment away from debt from external financing that has allowed a huge gap between United Kingdom bank lending and deposits to open up. With bank lending not returning to anything approaching normality until mid-2010, (business] investment will fall by 15.2 per cent in 2009."

WHAT NEXT

Five forecasts of where the UK economy is going in the next year, all showing contraction – but by widely differing amounts.

0.75-1.25%

UK Treasury

1.7%

CBI

2.5%

Capital Economics

2.7%

IHS Global Insight

2.9%

CEBR