Sean O'Grady: No matter what Darling does, this is not going to be a short, sharp shock

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Alistair Darling yesterday became the first Chancellor in a decade-and-a-half to present the House of Commons with a negative forecast for growth. Mr Darling says the UK economy will grow by about 0.75 per cent this year, and shrink by between 0.75 per cent and 1.25 in 2009, before returning to growth of 1.5 per cent to 2 per cent the year after.

He acknowledged that the economy will decline during the first half of 2009 before embarking on its recovery. Those grim numbers make the Chancellor's last forecast, made at the time of the Budget, seem ludicrously upbeat.

In March, Mr Darling put output growth this year at about 2 per cent, in 2009 between 2.25 and 2.75 per cent and, in 2010, 2.5 to 3 per cent growth. Now Mr Darling has been forced to downgrade savagely his outlook for the UK economy, and that itself accounts for at least £50-60bn of the record £118bn borrowing announced by the Chancellor for next year.

Almost as startling was Mr Darling's estimate of inflation reaching 0.5 per cent by the end of next year; implying that it could fall even lower during the year. Economists at JP Morgan suggest that the Retail Price Index measure of inflation could drop as low as minus 4.4 per cent by the middle of 2009, and the Consumer Price Index to minus 0.6 per cent, which will have major, positive, implications for living standards.

As recently as last year, the economy was growing at a more than respectable rate of 3 per cent a year. By the second quarter of this year, growth has ground to a halt with a zero rate reported by the Office for National Statistics. Between July and September the UK economy contracted by 0.5 per cent – a sharper decline than many observers thought possible.

For the first time since 1991, the UK is faced with a year where the economy contracts. The question most commentators were trying to answer yesterday was how deep the contraction might be, and for how long, given the enormous stimulus – equivalent to almost2 per cent of GDP – Mr Darling has given the economy, and given the Bank of England's policy of aggressively cutting interest rates. Commentators such as the Ernst & Young Item Club and the National Institute of Economic and Social Research (NIESR) agreed that the package announced by Mr Darling will add about 0.2 per cent to the UK's growth performance – enough to make the recession slightly less severe, but not to avoid it and perhaps not even to make it shorter. Simon Kirby, UK economist at Niesr, said "the Chancellor's measures are unlikely to stop output falling sharply next year". "The combined package of indirect tax cuts and shifting investment forward would reduce Niesr's recent forecast fall in output from 1.5 to 1.2 per cent next year," he added. "The pre-Budget report estimate of trend growth looks very optimistic, and the recovery into 2010 they forecast is hopeful."

The three previous recessions in the UK – 1974-75, 1979-81 and 1990-2, saw the economy contract by about 2.3 per cent, 3.5 per cent and 1.5 per cent respectively. This recession may turn out to be less sharp than any of those but, because of the sheer scale of the boom before it, and the debt that now has to be paid back and the long-term problems faced by the banks, one way or another, the recovery may be more anaemic than it has been in previous downturns.

The IMF last month also radically reduced its estimates for UK growth and put this country at the bottom of the league table of the world's major advanced economies.

Few doubt that the UK, with its especial reliance on housing and the financial services sector, may suffer more than many other large economies in the months ahead, no matter what the Chancellor did yesterday or has planned for next spring's Budget.

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