Economists warn of 'feeble' UK recovery

Britain's economy will shrink by 2.7 per cent this year and stage only a "feeble" recovery in 2010, one of the country's most respected economic forecasters warned yesterday. The National Institute of Economic and Social Research is the latest independent forecaster to warn that the Government's current economic projections – for a recession that is over by the third quarter of this year and is followed by a strong recovery – are over-optimistic.

"The subsequent recovery will be feeble and GDP will grow by only 0.6 per cent in 2010," said Martin Weale, director of the NIESR. "The longer-term outlook is for a lower trajectory for growth."

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The think-tank's prognosis for the UK's economy includes a string of gloomy projections. The NIESRbelieves unemployment will hit 7.4 per cent by the end of this year, rising to 8.4 per cent in 2010, which would equate to joblessness rising well above 3 million.

The forecaster also warns that while many consumers' disposable incomes will actually rise this year as inflation falls, spending will slip further amid nervousness about job losses.

If the NIESR's projections, which are in line with those made by the International Monetary Fund last week, prove accurate, the effect on the country's public finances will be serious.

Mr Weale said: "Reflecting the greater severity of the recession, the publicfinances will deteriorate even more than predicted by the Treasury in November's pre-Budget report." The NIESR expects public sector net borrowing to hit 8.7 per cent of GDP in the 2009-2010 tax year, and 9.5 per cent in 2010-2011.

On this basis, the NIESR added, public sector net debt will rise to 70 per cent of GDP in 2012-2013, compared with the 57 per cent forecast by the Treasury. That would be close to double the 40 per cent limit, which the Government stipulated in its fiscal rules until abolishing this framework last year.

The think-tank's projections will worry policymakers, who are already struggling to cope with a swath of bad economic news. The Bank of England's Monetary Policy Committee begins its monthly interest-rate meeting today and is widely expected to cut the cost of borrowing – already at a record low of 1.5 per cent – again tomorrow.

The latest economic data gives the MPC little reason to consider holding fire on rates, despite calls for the committee to be mindful of savers.

Nationwide Building Society said yesterday that its index of consumer confidence registered another sharp fall in December, despite a pre-Christmas interest-rate cut and price cutting in the shops. Fionnuala Earley, Nationwide's chief economist, warned: "We expect consumers to remain cautious as they take stock of how these economic conditions will act upon them."

The Chartered Institute of Purchasing and Supply added to the gloom with its latest index of activity in the construction sector. CIPS said the rate at which the sector was declining had slowed slightly since December, but still showed output dropping in almost every part of the construction industry.

Accountant KPMG also warned of the dangers inherent in the speed at which the UK economy is slowing. Its latest report on employment, compiled with the Recruitment & Employment Confederation, shows there was a sharp fall in permanent and temporary hirings in December, and notes increasing evidence that salaries have also begun to fall quite markedly.

Mike Stevens, head of business services at KPMG, said demand for staff had fallen faster in December than at any time since 1997. "This was yet another month of desperate news on the UK employment front," Mr Stevens added.