UK 'on brink of modest recession'

Britain is on the brink of a modest recession that will be followed by months of stunted growth, a bleak forecast from the OECD said today.

Predicting that the UK will endure another period of contraction, the Organisation for Economic Co-operation and Development said GDP will shrink in the final quarter of 2011 and the first quarter of 2012.

It slashed the UK's 2012 growth to just 0.5% from 1.8% earlier this year and said it expects unemployment to hit 9.1% by 2013, putting another 400,000 people out of work.

The OECD said the eurozone debt crisis was "the key risk" to the world economy and warned the slowdown in global growth is in danger of escalating into a full-blown recession without "decisive action" to shore up the currency bloc.

It said the eurozone already appears to be in a mild recession and it now expects the currency bloc to grow just 0.2% in 2012, down from its previous estimate of 1.6%, in a major blow for the UK's export hopes.

OECD chief economist Pier Carlo Padoan said eurozone leaders had failed to take urgent action to tackle "the real and growing risks to the global economy".

He called for a "substantial" increase in the eurozone bailout fund and for the European Central Bank to play a greater role in shoring up the finances of debt-ridden nations to prevent the crisis dragging the world economy down.

With growth in the UK hit by weak demand for exports, the Government's austerity measures and the squeeze in consumer spending, the OECD expects the Bank of England to pump a further £125 billion into the economy in the coming months, bringing the total to £400 billion.

The UK's slump is set to be modest compared with the 2008/09 recession and the economy is likely to start recovering after two quarters of decline. GDP growth of 1.8% is forecast in 2013.

But there is a risk that the downturn will be deeper than projected, as the eurozone debt crisis has the potential to hit the banking sector and weaken confidence.

It warned that the Government should be ready to pump more money into banks if the financial crisis worsens.

The OECD also said unemployment, which currently stands at 8.3% - its highest since 1996 - will rise to 9.1% in 2013, putting another 400,000 workers out of a job on top of the 2.6 million already unemployed.

Employment is likely to take a bigger hit than in the last recession because businesses have less scope to reduce wages and adjust the amount of time employees' work.

The OECD called on the Government to pump more resources into employment training to help mitigate the impact of rising unemployment, particularly for young people who are already suffering a 20% rate of joblessness.

Chancellor George Osborne may also have to consider easing his programme of spending cuts if the economy worsened but will still have to increase austerity measures later to ensure medium-term targets are met. It suggested the Government could further increase the retirement age to improve long-term prospects.

The Chancellor, who is tomorrow due to report a series of measures to boost the economy in his Autumn Statement, said: "What is clear from the OECD is that these are very difficult times for many countries in the Western world.

"The OECD is predicting deep recessions in many European countries. That is a challenge for Britain.

"What we can do with our policies is take Britain safely through this storm. But we have got to lay the foundations for future economic success."

France, Germany and Italy are predicted to suffer contractions as the eurozone debt crisis worsens.

Emerging nations are growing more slowly than previously thought and there was also a danger the US could slip back into recession amid its austerity measures, according to its forecast.

Prime Minister David Cameron will travel to Paris on Friday for talks on the eurozone crisis with President Nicolas Sarkozy ahead of next week's crunch summit of the European Council.

A Treasury spokesman said: "The UK economy is not immune to the turbulence in the eurozone and its impact on British businesses, but the difficult decisions taken by the Government has made the UK a relative safe haven in the sovereign debt storm and helped to keep interest rates at record low levels for businesses and households.

"The Government is using all levers to protect the UK economy."

PA