Britain Faces Shallow Recession In H2

Source : The Business Times, September 16, 2008

(LONDON) Britain is heading for a shallow recession in the second half of this year and next year's economic growth will be the weakest since 1992, the Confederation of British Industry said yesterday.

Slowdown: The CBI cut its growth forecast for this year to 1.1% from 1.7% and slashed its 2009 forecast to 0.3% growth from 1.3%

The CBI cut its growth forecast for this year to 1.1 per cent from 1.7 per cent and slashed its 2009 forecast to 0.3 per cent growth from 1.3 per cent, urging the Bank of England (BOE) to cut interest rates to 4.5 per cent from 5 per cent in November.

The CBI expects GDP to contract 0.2 per cent on the quarter in the three months between July and September and 0.1 per cent in the fourth quarter, with contraction spilling over into next year before the economy starts to recover.

'Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived,' the CBI's director-general, Richard Lambert said.

'This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged. Although the credit crunch will be with us for some time, conditions are set to improve later in 2009. The bank should have leeway to cut interest rates.'

Easing commodity prices and a weaker economy mean that inflation will fall back quite rapidly over 2009 and near the BOE's 2 per cent target in the fourth quarter of 2009 after peaking at around 4.8 per cent this year, the CBI said.

Inflation could then undershoot the Bank of England's target in 2010, making room for rates to be cut to 4 per cent by next spring, it said.

'The Bank of England's hands have been tied in recent months by the relentless rise in inflation,' said Ian McCafferty, CBI chief economic adviser.

'But with oil prices heading lower, very weak economic activity for a number of quarters, and little evidence of wage pressure, interest rates cuts will soon be justified,' Mr McCafferty said.

The CBI forecasts showed unemployment breaching the 2 million mark in 2009, with a jobless rate of about 6.5 per cent. -- Reuters