Page last updated at 00:01 GMT, Saturday, 15 November 2008

UK in for 'prolonged recession'

Car production line

A severe downturn is unavoidable and the recession in the UK will be "painful and prolonged", the British Chambers of Commerce (BCC) has said.

A sharp rise in unemployment to almost three million is very probable.

The lobby group expects the government to introduce a significant fiscal stimulus package of between 12bn and 18bn before the end of the year.

But sterling may "plummet to dangerous lows" if markets see the government's fiscal measures as reckless, it said.

The economy shrank for the first time in 16 years between July and September, confirming that the UK is on the brink of recession. The UK will be classed as being in recession if the economy slows in the fourth quarter as well.

On Wednesday, the Bank of England said the UK has probably entered a recession in the middle of 2008 and is likely to continue to contract well into 2009

Economic pain

Sharp cutbacks in investment spending, falls in consumer spending and big falls in inventories will drive the recession in the UK, the business group said.

It forecasts five consecutive quarterly declines of GDP - between the third quarter of this year and the third quarter of 2009, a cumulative drop of 2.25%.

The pound may plummet to dangerous lows
British Chambers of Commerce

It forecasts that average UK GDP growth will drop from 3% in 2007 to 0.8% in 2008 and minus 1.6% in 2009, before registering growth of 1.1% in 2010.

Annual CPI inflation will fall well below the 2% target in the final months of 2009, with a "distinct risk" the UK would experience temporary deflation at the end of next year.

Fiscal help

Given the seriousness of the recession, the government's fiscal rules need to be abandoned, the lobby group said.

The BCC assumes the government will introduce a fiscal stimulus package before the end of the year - if this package is inadequate or lacks credibility, then the recession could be worse, with cumulative GDP falls totalling 3.1%, it warns.

Public sector net debt (PSNB) is expected to total 111bn in 2008/09, 7.6% of GDP, a "massive deficit" which contains big risks, it said.

"It is critically important that the fiscal package is accompanied by a credible strategy for restoring the UK budget position to a sound basis over the medium term," the statement said.

"If the markets interpret the UK measures as being reckless, the pound may plummet to dangerous lows, and yields on gilts could rise sharply, thus forcing the Government to change course and frustrating its policy aims," it said.

The fiscal stimulus package should focus on tax cuts initially, while lower business taxes and NIC rates are an effective way of staunching a rise in unemployment, it added.

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