Page last updated at 08:42 GMT, Monday, 17 November 2008

'Close to 3m unemployed' by 2010

A woman looks at credit crunch lunch sign outside a pub in Edinburgh.
Businesses are struggling as the credit crunch bites.

The UK's recession will be tougher and longer than first thought, the business group CBI has warned.

It estimates that the economy will shrink by 1.7% in 2009, a dramatic downgrade from the forecast of 0.3% growth the CBI gave in September.

The group added that unemployment could peak at close to 2.9 million by 2010, up from 1.8 million at present.

Business Secretary Lord Mandelson has defended government plans to increase borrowing to boost the economy.

"We have to take every action we can as a government," he told the BBC.

He said the recession was "not made by the government" but that it was the government's job is to make the recession "as short and as painless as possible".

"Now people will say but you're resorting to borrowing in order to deliver the stimulus that's needed," added.

"My answer to that is what is the alternative?"

'New order'

Meanwhile, the UK's biggest union, Unite, has drawn up a 10-point plan to invigorate the UK economy.

What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting
John Cridland, CBI deputy director general

It includes an increase in public spending and a halt to house repossessions. It also calls for a million new affordable homes to be built.

The union also wants to see support for manufacturing, a windfall tax on energy firms' profits, tighter regulation of the financial sector, and increased worker rights.

Unite joint general secretary Derek Simpson called for "a new economic order".

Downgrade

The CBI report said it had hoped the recession would be "shallow" but said October's banking sector turmoil now made this unlikely.

The UK 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 technically classed as being in recession if the economy, as expected, contracts in the fourth quarter as well.

John Cridland, CBI's deputy director general, said that turmoil in the banking system in September and October had sent consumer and business confidence plummeting.

"Given the speed and force at which the downturn has hit the economy, we have reassessed and downgraded our expectations for UK economic growth," he said.

"But the fast-moving and global nature of this crisis means it is impossible to look far ahead with any certainty.

"What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting."

'Troublesome'

Mr Cridland told the BBC that the slowdown in the economy was the effect of a "double whammy".

"First of all the banking crisis had really deep effects on the availability of credit for business - not only credit from the banks, but credit insurance as well - and that is now proving troublesome for an awful lot of businesses small and large," he said.

"Alongside that, the impact of relentless bad news every day on the news has caused people to stop spending - companies as well as individuals - so there's a sharp fall in demand for products and services and businesses are having to batten down the hatches."

The CBI expects the economy to contract by 0.8% in the final quarter of 2008 and says the economy will continue to shrink in the subsequent three quarters before beginning to recover in 2010.

Recovery 'long way off'

The group forecasts that interest rates could possibly fall as low as 1.5%, from 3% currently, as the Bank of England moves to kick-start the economy.

It said inflation was likely to ease, with the rate of consumer price rises expected to fall to 1.7% from 4.2%.

Mr Cridland told the BBC: "We're predicting something like five quarters of negative growth.

"I think we would see the last quarter of 2009 - in other words a year from now - at the point where hopefully we would just begin to get back to steady growth and then a beginning of an upturn in 2010.

"So I'm afraid it's quite a long way off."



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