Page last updated at 11:16 GMT, Friday, 28 March 2008

Report warns of UK recession risk

Sale sign
Consumers are expected to tighten their belts

There is a one in three chance of the UK going into a recession over the next two years, according to investment bank Lehman Brothers.

It says the global financial turmoil is increasing mortgage rates and predicts this will reduce consumer spending.

Lehman Brothers says the Bank of England will be forced to cut rates to 4% or lower to boost the economy.

The report comes as the latest revised official figures cut the annual rate of UK growth at the end of 2007 to 2.8%.

The annual growth rate in the October to December quarter was trimmed from an earlier estimate of 2.9%, and was the lowest rate since the second quarter of 2006.

The Office for National Statistics figures showed growth during the fourth quarter remained unrevised at 0.6%.

'Considerable strain'

A recession is defined as two consecutive three-month periods where the economy contracts.

"It has become clear that the banking system - and hence the credit creation process - is under considerable strain," Lehman Brothers said.

The bank says the credit crisis is now having an impact beyond the financial world as households are finding it more difficult to borrow money to buy a house or remortgage their existing property.

The investment bank says this will have an impact on the housing market and predicts house prices will fall about 8% by the end of next year.

"Given the importance of housing wealth for consumer spending, this points to an economic slowdown that could last some time."

Economist Howard Archer from Global Insight said he believed the UK economy would slow, but not enter a recession, despite consumers tightening their belts in the face of increased mortgage rates, higher food and utility bills.

"We believe the UK is set for an extended period of markedly below-trend economic growth, although we remain hopeful that it will avoid recession," Mr Archer said.

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