UK economy 'will contract next year'

The Bank of England

Thursday, 28, Aug 2008 12:01

UK GDP will contract by 0.2 per cent over 2009, according to a new economic analysis.

Capital Economics forecasts the first annual shrinking in the economy since 1991 – with the credit crunch's squeeze on lending knocking the economy into recession.

George Osborne, Conservative shadow chancellor, said: "Another day brings another gloomy prediction about the British economy.

"The Brown bubble has burst and, thanks to Labour’s economic incompetence, nothing was put aside for a rainy day to help British families cope."

The economy is also seen to suffer from a slowdown in the eurozone – halting any hopes the low value of sterling would promote demand for exports.

Domestic demand is also expected to suffer.

Jonathan Loynes, chief UK economist at Capital Economics, said: "The upshot is that, after growth of about 1.2 per cent this year, we now expect the UK economy to contract by about 0.2 per cent in 2009. We previously forecast growth of +0.5 per cent.

"This projection is well below the latest consensus forecast of +0.9 per cent."

However, the slowdown and a halting of high food and fuel inflation should allow interest rates to drop.

"But these developments won’t prevent the economy from slowing further over the next year or so," said Mr Loynes.

Interest rates are forecast to fall by 3.5 per cent in the coming year and "it is quite plausible that they fall even further than this," Capital Economics predicts.

Research yesterday from Standard & Poor's finds with high levels level of household debt and the sharp downturn in housing, the UK is more exposed to a true recession than the Eurozone considered as a whole.

The ratings service also finds Europe may well be heading for a recession.

It finds the eurozone economies are currently facing slower growth in world trade, an overvalued euro, stagnating real incomes for consumers and a fall in asset prices.

"As a result of this new negative data, consumer and business surveys consistently show that the fear of an actual recession dominates," said Jean-Michel Six, chief economist for Europe.

"With inflation doggedly remaining high, the question remains: Will Europe enter stagflation - stagnation plus high inflation - or even worse a genuine recession?"