Page last updated at 07:52 GMT, Monday, 21 July 2008 08:52 UK

'Gloomy' forecast for UK economy

Woman passing a shop in London with a sale on
Experts say consumer spending will be flat next year

The outlook for the UK economy next year is looking gloomier with business confidence fast evaporating, top forecasters have suggested.

Growth will be just 1% in 2009, the Ernst & Young Item Club has predicted, as rising living costs and falling house prices dampen consumer spending.

Confidence among employers, meanwhile, has fallen to its lowest level since 1996, the Institute of Directors said.

However, retailers in central London saw strong sales growth last month.

Income squeeze

Like-for-like sales there were 8.7% higher than a year ago, a marked contrast to the picture across the whole of the UK where sales fell 0.4%.

A series of bleak assessments recently have warned that the economy may be at risk of going into recession over the next year.

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The Ernst & Young Item Club said the economy would "struggle" to avoid recession next year with growth slowing and inflation remaining well above target.

Minimal growth in real disposable incomes, allied to the sharp rise in the cost of basic foods and fuel bills, means that consumers will be forced to cut back on non-essential spending.

"Both on the high street and in the housing market it is going to get a great deal worse before it gets better," said Professor Peter Spencer, the Item Club's chief economist.

The Item Club is expecting house prices to fall 10% this year and a further 6% in 2009.

However, it believes mortgage holders will get a little respite as the Bank of England moves to cut borrowing rates later in the year in the face of a rapidly weakening economy.

The sharp fall in overall business optimism is very worrying and points towards a recession
Graeme Leach, Institute of Directors

"We expect base rates to fall to 4% by the end of the year," Prof Spencer added.

"This will help put a cushion under the level of demand in the economy and set the scene for a recovery in 2010."

Mixed feelings

Employers are more gloomy about their future prospects than at any time for a decade, the Institute of Directors (IoD) survey of 500 firms found.

However, at the same time, a majority of companies surveyed still expect to increase their workforce next year and to boost investment.

Equally encouragingly, most firms still expect profits to be higher this year than last.

Man passing a shop with a sale on
London's shops did well in June but at what cost to their margins?

The IoD said the figures were not a cause for panic but suggested conditions could be much more difficult for firms next year.

"The sharp fall in overall business optimism is very worrying and points towards a recession," said its chief economist Graeme Leach.

"Other results suggest we can still escape with a sharp slowdown over 2008-09."

London's retail performance last month suggests that shoppers are not having to tighten their belts as sharply as people in other parts of the country.

While the figures were boosted by the better weather and tourist spending, the British Retail Consortium said much of the increase was due to discounting and early summer sales.

"Much of that is being driven by early sales and the most widespread price cutting in recent history but the contrast with the rest of the UK is stark," said its director-general Stephen Robertson.




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