No recession, but slowest growth since 1990s

25-07-2008

No recession, but slowest growth since 1990s
UK economic growth will fall to just 1.5 per cent in 2008 and 1.4 per cent in 2009, as the effects of high oil prices and the credit crunch combine.

The UK should escape recession, but annual growth up until 2011 will be the lowest since the slump of the early 1990s, the National Institute of Economic and Social Research's (NIESR) economic review forecasts.

The report states: "After a long period of robust growth and low inflation, the economic outlook has darkened.

"Growth is slowing and inflation is rising."

Simon Kirby, senior research office, said: "We expect growth to pick up in 2009/10 but it will not be a return to the great rates of growth seen in recent years."

Inflation is expected to average 3.6 per cent in 2008, hit 4.1 per cent in the fourth quarter of 2008, and fall to 3.2 per cent over 2009. The rising cost of living is only forecast to fall to the two per cent consumer prices index (CPI) target in 2010.

Consumers are predicted to be hit by falling equity prices, declining housing wealth as property prices fall, the continuing credit crunch making borrower harder and rising prices biting in disposable income.

As a result consumer spending is expected to start falling for the first time since 1991 and only rise again in 2010.

The unemployment rate is also expected to rise until 2010.

However, the economy is expected to be held up by government spending, which has grown in recent years, and also a rise in exports as the depreciation in sterling makes British goods cheaper abroad and imports more expensive.

Mr Kirby said: "It is up to the government to push the economy along. Without government spending growing, we expect to see the economy stagnate."

NIESR is now calling on the Bank of England's monetary policy committee (MPC) to send a signal about the danger of inflation and raise interest rates.

Mr Kirby said: "The markets suggest a rate increase of 0.25 percentage points.

"The bank needs to send a signal to the economy as inflation expectations drift upwards. The MPC needs to nip this in the bud."

NIESR is demanding a rate hike to lower inflation expectations from the public so greater wage demands do not cause inflation to rise even further.

However, the body predicts the cost of borrowing to fall in 2009.

Some danger does exist to the UK economy from the US.

NIESR predicts with a recession in the US would not take the UK with it, a major crisis in the American financial system could lead UK GDP growth down to zero per cent.

"It would take a five per cent fall in US output to slow the UK economy to zero growth. A collapse of US banking would let the monster out of the bag," said Ray Barrell, senior research fellow at NIESR.


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