Page last updated at 15:15 GMT, Wednesday, 6 May 2009 16:15 UK

UK recession 'worst since 1930s'

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The NIESR says unemployment could hit close to 10%

The UK recession could be the worst since the early 1930s, a leading economic research body has predicted.

The National Institute of Economic and Social Research (NIESR) said in 2009 the country's GDP could contract by 4.3%, and then grow in 2010 by 0.9%.

But the Nationwide Building Society said UK consumer confidence saw its biggest rise in two years last month.

Separately, a committee of MPs has criticised the government's growth forecasts as "too optimistic".

The government has predicted the economy will shrink by 3.5% this year, and then grow by 1.25% in 2010.

But the Treasury Committee said it was "very concerned about the state of the public finances" in its report on the Budget, and questioned the chancellor's assumption that positive growth will resume in the final quarter of this year.

Meanwhile, the Nationwide's consumer confidence index rose to 50 in April, up from 42 in March - the most marked improvement since May 2007.

Work until 70

One of the issues facing the chancellor is how to bring public debt, which is expected to double to 79% of GDP by 2013, under control.

The institute thinks the chancellor's being optimistic about the strength of the recovery
Stephanie Flanders
BBC economics editor

One way of doing this, the NIESR said, would be to raise the retirement age, and quickly.

The current state pension age is 60 for women and 65 for men. Under existing plans, that is due to increase to 68 for both men and women between 2024 and 2046.

However, the NIESR recommends raising the state pension age to 70 between 2013 and 2023.

"That is a way of easing the pensions problem as well as helping the public finances because if people aren't drawing their state pensions until they're 70 that improves the government's tax position," Martin Weale, director at NIESR, told the BBC.

'Feeble recovery'

The NIESR report forecasts a sharper contraction in the UK economy this year than the predictions made by the International Monetary Fund (IMF), but is more optimistic about 2010.

The IMF, in its latest economic forecast, has suggested that the UK economy will shrink by 4.1% this year and by a further 0.4% next year.

Forecasts on UK economic growth

In its report the NIESR says: "The pace of decline to date shows a remarkable resemblance to that of the depression of the early 1930s, though that similarity should be broken as a feeble recovery gets under way in the final quarter of this year."

It says that the economy will manage to pick up to a 2.3% growth rate in 2011.

The economic body also forecasts that "unemployment will carry on rising to a peak of 3.1 million people - 9.6% of the labour force in 2011".

And it warns that the outlook for the public finances during the recovery would be even worse than the chancellor set out in the recent Budget.

It said that was because GDP would rise by less than Alistair Darling expects "as both real growth and inflation turn out to be lower".


BBC economics editor Stephanie Flanders said Mr Darling would not relish the historical comparison.

But she added: "Where the UK is concerned, the year you really don't want to replicate is 1921, when the economy shrank by nearly 10%.

"Thankfully the NIESR doesn't think we're approaching that territory right now. Although you might imagine so, given the carnage afflicting the public finances.

"Like many others, the institute thinks the chancellor's being optimistic about the strength of the recovery from 2010."

Consumer confidence

But the NIESR's gloomy prognosis was countered by the Nationwide figures, which indicated a steep jump in the proportion of people who felt upbeat about how the economy and labour market would be performing in six months' time.

About 26% of people think the economy will have improved in six months, up from 19% in March, while only 32% think it will be worse, down from 41% a month ago.

Senior economist Martin Gahbauer said: "In recent weeks, we have seen a strong rebound in global equity markets and some tentative signs of improvement in housing market indicators, both of which may have contributed to the marked upturn in consumer confidence during April."

Meanwhile there was also optimistic data from the service sector.

The CIPS/Markit services PMI index, which measures confidence among businesses such as hotels and restaurants, registered its highest reading since August 2008 and the biggest rise in the index since April 1999.

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