UK faces worst slump since 1948

Some of the gloomiest forecasts yet for the UK economy were released just post Christmas as analyst predicted a further decline in consumer spending and a slump in business investment.

The scale of decline would mark the worst annualised decrease since official records began in 1948.

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 the optimistic 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.

Britain's economy will shrink by 2.9 per cent in 2009, the worst one-year fall in gross domestic product (GDP) since 1946, a leading think tank warned Friday in one of the gloomiest forecasts yet.

Analysts at the Centre for Economics and Business Research (CEBR) also said that if the financial crisis triggers a series of cutbacks, the economy could shrink by up to 10 per cent -- setting Britain back by five years. They have predicted that the UK economy is falling by 2.9 per cent.

The think tank said exporters have been helped by the falling pound but warned consumers will cut spending as unemployment rises. The biggest problem is likely to be falling business investment, it said.

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.

The report says: "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."

While the retail sales in UK showed some cheer, the downturn in the economy will take years to recover.
 
A look at key facts

• Figures from the British Bankers' Association showed approvals for home loans fell to just 17,773, down 61 percent on the year.
• The UK's gross domestic product fell by 0.6 per cent in the July to September period, not by 0.5 per cent as previously reported, the Office for National Statistics said this morning. The annual growth rate of 0.3 per cent was the weakest since 1992.
• The Bank of England cut interest rates by three percentage points between October and December, taking them to a 57-year low of 2 per cent. Further rate cuts are expected edging the interest rate close to 0 per cent.
• The British Pound continued its move towards parity against the Euro and is sliding lower against the US Dollar, which suggests that investors remain bearish against the currency as market participants widely expect the Bank of England to lower borrowing costs even further in January.

Nevertheless, financial uncertainties paired with the ongoing downturn in the housing sector is likely to stoke increased selling pressures for the currency over the near-term as the economic calendar continues to reflect a dour outlook for growth.