Page last updated at 14:10 GMT, Friday, 26 December 2008

Gloomy prediction for UK economy

A shoppper walking past a store window
Forecasters say consumers will cut spending because of unemployment

A stark picture of the prospects for the UK economy has been painted by an independent group of economists.

The Centre for Economics and Business Research (CEBR) predicts the economy will shrink by 2.9% in 2009 - more than at any time since the 1940s.

It expects consumer spending to decline and investment in business to slump.

The forecasters say exporters will be helped by the slump in the pound's value, but even their prospects will be held back by a global slowdown.

Painful readjustment

The CEBR's research suggests the economy will contract by its largest amount since 1946, when the country was in the grips of mass de-mobilisation after the war.

The forecasters say the economy is undergoing a painful readjustment, as consumers cut spending because of rising unemployment.

But the big threat, they say, is a predicted collapse in business investment of 15% because firms will struggle to get finance.

Several analysts have made predictions of a 2.5% fall in GDP next year.

Martin Weale, director of the National Institute of Economic and Social Research told the BBC's World at One programme: "If the economy is to recover and put on a sustainable footing that does mean we have to be much more export-orientated."

He said there would have to be less focus on the "illusion of wealth" created by rising house prices, on consumer spending as a way of driving the economy and on the financial sector as a source of wealth.

I hope there will be a change in attitudes and we start to look at what really makes us happy
Simon Woodroffe

He said: "There are a range of different predictions for the likely contraction of the economy next year.

"They range from the under 1% figure in the November budget to some much larger numbers that would put us on a par with Germany's experience in the Great Depression.

"So if we have a German-type experience there will be millions of jobs lost. If things turn out as the government hopes, it's likely unemployment will stay under three million."

He said he believed the government realised that it would get far less tax revenue from its usual sources and therefore would have less money to spend.

"The November budget figures recognises this but what they don't know - none of us know - is quite how big the impact is going to be," he said.

Attitude changes

Simon Woodroffe, the entrepreneur who founded the Yo Sushi chain, told the BBC: "There will be major disasters on the High Streets right throughout the year.

"This recession will put lots of people out of business.

"I think what will happen is that it will take a lot longer to recover and blow a lot deeper. I hope there will be a change in attitudes and we start to look at what really makes us happy."

CEBR managing economist Ben Read told the Daily Telegraph things could be even worse.

He said the main concern of many larger banks was to "shore up their balance sheets" and pay back any debts to the Treasury.

Earlier this week official figures confirmed the UK economy is sliding towards recession faster than was first thought.

Revised data showed a 0.6% decrease in output between July and September - the worst since 1990 and bigger than the 0.5% fall first estimated by the Office for National Statistics (ONS).

Chancellor Alistair Darling has said the UK will return to growth in the second half of 2009.

He predicts stimulus moves funded by extra borrowing - such as the VAT cut - will see a "shorter and shallower" slowdown than feared.

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