Economy faces worst year in three decades, says CBI

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The British economy is set to suffer its worst year in three decades in 2009, contracting by as much as 1.7 per cent, according to new forecasts from the CBI.

The gloomy forecast marks a sharp change in sentiment at the CBI where only two months ago its economists were predicting positive growth of 0.3 per cent for next year.

The business group also believes Britain is on course to hit its highest rate of unemployment for 15 years in early 2010, with 2.9 million people, or 9 per cent of the workforce, expected to be out of a job.

Owing to the shrinking economy, the CBI expects a sharp fall in inflation over the coming months, leaving the Bank of England greater flexibility to make further interest rate cuts. After an unexpected 1.5 percentage-point cut in the Bank rate at the start of November, rates are at 3 per cent. However, the CBI believes they may fall as low as 1.5 per cent over the coming months.

"Since our last forecast was published in September, the banking system has come under immense strain, sending consumer and business confidence plummeting in its wake," said John Cridland, the CBI's deputy director general. "Given the speed and force at which the downturn has hit the economy, we have reassessed and downgraded our expectations for UK economic growth. 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. An unwelcome consequence of the downturn will be a significant loss of jobs, many of them in sectors that have been relatively insulated until now."

Unemployment hit 11-year highs of 5.8 per cent during the third quarter of the year. However, if jobless numbers peak at 9 per cent, it will still be a lot lower than previous recessions. In the last recession, during the early 1990s, unemployment peaked at 10.9 per cent, while in the early 1980s it surpassed 12 per cent.

The CBI said one of the biggest problems for businesses was still a lack of capital. Ian McCafferty, the CBI's chief economic adviser, said that if this situation did not ease soon, the consequences could be severe. "Since October's financial turmoil, companies have started to report that, for the first time, they are finding it increasingly difficult to access capital," he said. "If this were to be more than a temporary phenomenon, it would result in otherwise healthy companies going to the wall for lack of short-term finance. This would have serious implications for both employment and investment."

Meanwhile, new data from estate agents Rightmove, to be published today, will show the fall in house prices is accelerating. Its index of asking prices recorded a 2.9 per cent drop over the past month, compared to a fall of only 1 per cent in the previous month. Year on year, it says the average asking price is now down 7.1 per cent.

"Some sellers could avoid months of disillusionment and despair if they started marketing at an asking price a lot closer to where the evidence indicates they are likely to end up," said Miles Shipside, commercial director at Rightmove. "While average asking prices have fallen by 7.1 per cent over the past year, in most parts of the country you should look to at least double that discount to achieve a sale."