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UK economy 'already in recession' UK economy 'already in recession'
(10 minutes later)
The UK economy has "deteriorated dramatically" in the last three months, and is already in a recession, top forecasters have suggested.The UK economy has "deteriorated dramatically" in the last three months, and is already in a recession, top forecasters have suggested.
The Ernst & Young Item Club predicts that economic growth will decline by 1% next year before recovering in 2010, when it will see 1% growth.The Ernst & Young Item Club predicts that economic growth will decline by 1% next year before recovering in 2010, when it will see 1% growth.
As the economy contracts, unemployment will rise and investment will fall. As the economy contracts, investment will fall and unemployment will rise.
But one "bright spot" is that inflation is likely to fall, enabling the UK to cut interest rates further, it said.But one "bright spot" is that inflation is likely to fall, enabling the UK to cut interest rates further, it said.
While recent actions taken by the government to shore up the banking system are welcome, the credit crunch will hit the economy "very hard", warned Ernst & Young.While recent actions taken by the government to shore up the banking system are welcome, the credit crunch will hit the economy "very hard", warned Ernst & Young.
Peter Spencer, chief economist for the Ernst & Young Item Club said: "Even if the equity markets stabilise and we begin to see capital flowing around the international financial system again we are still looking at a domestic and global economy that will be recession for the next 12 months."Peter Spencer, chief economist for the Ernst & Young Item Club said: "Even if the equity markets stabilise and we begin to see capital flowing around the international financial system again we are still looking at a domestic and global economy that will be recession for the next 12 months."
But "with plunging interest rates, falling inflation, a fundamentally strong economy and some sort of stability in the banking system it should be a relatively short and shallow downturn," he added.But "with plunging interest rates, falling inflation, a fundamentally strong economy and some sort of stability in the banking system it should be a relatively short and shallow downturn," he added.
It is not alone in thinking the UK has entered a recession - which is typically defined as two quarters of negative growth.It is not alone in thinking the UK has entered a recession - which is typically defined as two quarters of negative growth.
A recent quarterly survey of 5,000 businesses by the British Chambers of Commerce (BCC) also said the UK was in a recession.A recent quarterly survey of 5,000 businesses by the British Chambers of Commerce (BCC) also said the UK was in a recession.
Business investmentBusiness investment
Companies are likely to see their profitability squeezed further, prompting firms to invest 5% less in 2009, said the Item Club.Companies are likely to see their profitability squeezed further, prompting firms to invest 5% less in 2009, said the Item Club.
As a result of the slowdown, widespread cuts in investment and employment are "inevitable".As a result of the slowdown, widespread cuts in investment and employment are "inevitable".
While the largest job cuts so far have been in finance and housing - the sectors most closely linked to the recent turmoil - the effect will spread further.While the largest job cuts so far have been in finance and housing - the sectors most closely linked to the recent turmoil - the effect will spread further.
We desperately need a global solution given the heavy dependence of our banks and borrowers on cross-border banking flows Peter Spencer, chief economist, Ernst & Young Item ClubWe desperately need a global solution given the heavy dependence of our banks and borrowers on cross-border banking flows Peter Spencer, chief economist, Ernst & Young Item Club
It said it expected unemployment claims to hit 5% by the end of 2009, double what it was at the end of 2007.It said it expected unemployment claims to hit 5% by the end of 2009, double what it was at the end of 2007.
The report comes after recent data from the Office for National Statistics underlined the weakening labour market.The report comes after recent data from the Office for National Statistics underlined the weakening labour market.
The number of people out of work in the UK rose sharply in the three months to August by 164,000 compared to the previous quarter, marking the biggest rise for 17 years.The number of people out of work in the UK rose sharply in the three months to August by 164,000 compared to the previous quarter, marking the biggest rise for 17 years.
Flat spendingFlat spending
Until September quickening inflation had been a major concern - latest figures show the Consumer Prices Index reached a 16-year high of 5.2% for the month.Until September quickening inflation had been a major concern - latest figures show the Consumer Prices Index reached a 16-year high of 5.2% for the month.
But prices have fallen recently notably for energy and analysts expect September's figure to mark a peak.But prices have fallen recently notably for energy and analysts expect September's figure to mark a peak.
However, real disposable incomes are tipped to remain flat in 2009, before rising in 2010, said the Item Club.However, real disposable incomes are tipped to remain flat in 2009, before rising in 2010, said the Item Club.
As credit continues to be hard to obtain, and unemployment looks set to rise, consumption is seen falling by 1.2% next year.As credit continues to be hard to obtain, and unemployment looks set to rise, consumption is seen falling by 1.2% next year.
With credit - including for mortgages - hard to obtain, the Item Club sees house prices falling by 14% by the end of this year, before a 10% drop next year.With credit - including for mortgages - hard to obtain, the Item Club sees house prices falling by 14% by the end of this year, before a 10% drop next year.
Until the bottom of the market is reached and confidence returns the housing sector will be in "deep freeze", it predicted.Until the bottom of the market is reached and confidence returns the housing sector will be in "deep freeze", it predicted.
"Last year consumers were able to handle the income squeeze by borrowing and dipping into their savings," said the club's chief economist."Last year consumers were able to handle the income squeeze by borrowing and dipping into their savings," said the club's chief economist.
But this year "it is a very different story with credit harder to access and far more expensive" explained Mr Spencer.But this year "it is a very different story with credit harder to access and far more expensive" explained Mr Spencer.
Fiscal policyFiscal policy
Government intervention has pulled us back "from the brink" but the banking system is "in intensive care", said the Item Club.Government intervention has pulled us back "from the brink" but the banking system is "in intensive care", said the Item Club.
Earlier in October the UK government set out a number of initiatives to rescue the banking system by making £400bn available.Earlier in October the UK government set out a number of initiatives to rescue the banking system by making £400bn available.
But the report said that addressing problems in the UK's finance system could not be dealt with in isolation.But the report said that addressing problems in the UK's finance system could not be dealt with in isolation.
"We desperately need a global solution given the heavy dependence of our banks and borrowers on cross-border banking flows"."We desperately need a global solution given the heavy dependence of our banks and borrowers on cross-border banking flows".
Longer term it said the recent financial crisis had left huge question-marks over bank regulation and governance, as well as fiscal policy.Longer term it said the recent financial crisis had left huge question-marks over bank regulation and governance, as well as fiscal policy.