Page last updated at 22:13 GMT, Tuesday, 2 September 2008 23:13 UK

UK recession this year, OECD says

By Steve Schifferes
Economics reporter, BBC News

Car production line
Many UK manufacturers are uncertain about what the future holds

The UK economy is likely to fall into recession this year, according to the Organisation for Economic Cooperation and Development (OECD).

The Paris-based think tank predicts that the UK economy will shrink at an annual rate of 0.3% in the third quarter, and by 0.4% in the fourth.

According to the latest official figures, the UK economy did not grow at all in the second quarter of 2008.

The working definition of a recession is two quarters of negative growth.

The gloomy outlook for the UK economy has pushed the pound sterling to its lowest level for two years against the euro.

Responding to the OECD figures, Chancellor Alistair Darling said many leading economies were suffering from slowing growth and the UK could "get through" a difficult period with the right policies.

Dark clouds?

The OECD forecast is the gloomiest yet for the UK economy by an official organisation, even gloomier than the forecast released by the International Monetary Fund (IMF) one month ago.

In its latest report, the OECD says that the UK economy will grow by just 1.2% for the whole of 2008, a sharp reduction in its earlier forecast of 1.8% made just two months ago, and less than the 1.4% predicted by the IMF.

The OECD's figure is less than half the official Treasury forecast of 2.5%, although the Chancellor has recently indicated that this was likely to be revised downwards as the UK was facing "the worst economic conditions in 60 years".

The think tank is also gloomy about growth prospects in the rest of Europe, and says the region's three other largest economies - Germany, France, and Italy - will barely grow at all this year.

It points out that "financial market turmoil, housing market downturns, and high commodity prices continue to bear down on global growth".

The OECD adds that the particular circumstances of the credit crunch make for "a particularly unclear picture".

George Osborne on the government's plans to boost the housing market

The shadow Chancellor, George Osborne, said:

"This is more gloomy news, coming on the back of the Chancellor's warning that the economy is facing the worst crisis in sixty years.

"The depressing thing is that at the very moment when Britain needs a strong and united leadership, we have a weak and dysfunctional government."

Exports hit

The sharp revision of the growth forecast for the eurozone, with the German economy not growing at all in the next two quarters, will have consequences for the UK.

The eurozone is Britain's largest trading partner, taking 50% of British exports. With growth slowing, even with a devalued pound, there is unlikely to be strong demand in the export sector, analysts say.

According to the OECD, the US economy may grow slightly more strongly than it had previously expected, but "uncertainty as to the extent of weakness hinges importantly on how rapidly the effects of the temporary fiscal stimulus will fade".

In July, the US Treasury paid out $168bn in tax rebates to help boost the US economy.

The OECD adds that in view of the weak outlook for the future, the US central bank, the Federal Reserve, is right to keep interest rates low at 2%.

Gloomy outlook

The OECD sees the still-unfolding downturn in the housing market as the biggest problem facing Western economies.

It says that reduced credit supply is adding to the problem, with house prices still falling in the US, and downturns in housing market activity spreading in Europe from Spain, Ireland and the UK to other countries.

It adds that "potential further losses on housing and construction finance" are also a source of concern for the financial sector, especially as the "depth and extent of financial disruption is still uncertain".

The OECD also warns that "sharp increases in energy and food prices have boosted headline inflation and sapped real incomes of consumers".

However, it sees some reason for optimism on inflation, and says that if commodity prices are sustained at their current levels and do not rise to record levels again then "some moderation of both headline and underlying inflation is to be expected".

And if this happens, it suggests that there might be scope for the European Central Bank, which has recently raised interest rates, to cut them to boost the eurozone economy.

Given rising government budget deficits, it argues that monetary rather than fiscal policy should be used to boost the economy.

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