Page last updated at 12:00 GMT, Wednesday, 10 December 2008

UK economic slowdown 'worsening'

Car production line
The economy could worsen further in 2009, NIESR warns

The UK economy contracted 1% between September and November, the National Institute of Economic and Social Research (NIESR) has estimated.

This fall followed after a 0.8% drop in the three months to the end of October, said the think tank.

Indicating that the rate of output decline is "accelerating", the NIESR now expects a fall of more than 1% in the last three months of the year.

Official data showed that the economy shrank 0.5% from July to September.

But it will not be until January that the Office for National Statistics reports on the final quarter's GDP.

If it reports a decline for the three months to December, then the UK will be in officially in recession under the generally accepted definition of two consecutive quarters of decline.

The NIESR says it has a good track record in forecasting GDP growth in advance of the official figures.

'Real risk'

The latest data from NIESR is just the latest indication that the UK economy is most probably falling into a recession.

The main problem the government needs to address very urgently is the availability of bank credit,
NIESR

Martin Weale, the director of NIESR, said that the government would need to put more equity into the banking system so that it was better capitalised.

And he warned that things would not get better soon.

"I would not be terribly surprised if output continued to fall until 2010," he told BBC News.

The government has predicted a short, sharp recession, with recovery in mid-2009.

NIESR said the recession was likely to be deeper than first thought.

"The Government faces the real risk that, despite the [stimulus] measures it took in last month's Budget, output will fall more sharply than it expected to the end of next year," it said.

"The main problem that it needs to address very urgently is the availability of bank credit, and further interest reductions are unlikely to have much effect."

In addition to the recent cuts in interest rates, the Bank of England and the government have given the UK's banking sector billions of pounds in loans to try to restore lending levels to normal.

In response, banks such as Royal Bank of Scotland, Lloyds TSB and HBOS have all announced measures to increase lending to small firms.

The Organisation for Economic Co-operation and Development (OECD) also warned last week that the UK faces a "severe" economic downturn in 2009.

The Paris-based body predicted that economic output in the UK will fall by 1.1% next year, more than any other major G7 country.

It added that unemployment in the UK will likely rise significantly to over 8% by end of 2009 from 5.5% in 2008.

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