Wednesday, June 24, 2009

UK economy 'set to shrink faster'

By Steve Schifferes
Economics reporter, BBC News

The UK economy is still showing signs of weakness

The Organisation for Economic Cooperation and Development (OECD) has revised down its forecast for the UK economy in 2009.

It warns that the UK is in "a sharp recession" with output set to contract by 4.3% in 2009, worse than its previous forecast of a 3.7% fall.

The OECD predicts zero growth in the UK economy in 2010 and says the UK budget deficit will hit 14% of GDP next year.

Its UK forecasts are worse than those the Treasury made during the Budget.

However, a number of independent economic forecasters, including the National Institute for Social and Economic Research, have suggested that the recession is bottoming out in the UK.

On average, independent forecasts are projecting the UK economy to contract by 3.7% in 2009, close to the chancellor's forecast of -3.5%.

Borrowing worries

The OECD is particularly concerned about the size of the UK's budget deficit, saying that the "public finances have deteriorated sharply... curtailing the possibilities for additional fiscal stimulus".


UK 2009 -4.3%; 2010 0.0%

USA 2009 -2.8%; 2010 0.9%

Eurozone 2009 -4.8%; 2010 0.0%

Japan 2009 -6.8%; 2010 0.7%

OECD 2009 -4.1%; 2010 0.7%

World 2009 -2.2%; 2010 2.3%

Source: OECD Economic Outlook

It says the UK is one of four countries (the others are the Irish Republic, Spain and the US) where government borrowing will be above 10% of GDP in 2010.

The OECD warns that in the UK, rising public sector deficits will need to be reined in as recovery takes hold, and urges the government to develop a "concrete and comprehensive plan" to ensure debt is on a declining path.

It estimates that even if the UK reduces government borrowing by 1% of GDP per year for the next seven years, it will still have a gross debt-to-GDP ratio of 125% by 2017, one of the largest in the OECD.

Political row

The OECD comments have already sparked a political row.

The shadow chancellor, George Osborne, said: "The OECD figures show just how deep Labour's debt crisis is.

It looks like the worst scenario has been avoided


"The projected record budget deficit is worse than the Treasury forecast, the worst in the developed world and double what it was when Dennis Healey had to go to the IMF."

But for the government, the Chief Secretary to the Treasury, Liam Byrne, said: "Britain had the space to fight back hard against the global downturn because we had lower debt than most G7 countries before the crisis broke.

"If we invest now we can stop the recession cutting long and deep."

For the Liberal Democrats, Treasury spokesman Vince Cable said: "There is no doubt that the UK economy has been one of the worst hit.

"What is particularly worrying is that the government seems to have no coherent plan to get the British economy back on course and the Budget back into balance."

World recovery

Overall, the OECD is slightly more optimistic about the world economy, saying the world recession was "nearing the bottom" after a sharp decline in the six months to March.

It says rich nations' economies will shrink by 4.1% this year, compared with a forecast of -4.3% in March.

This is the first time for two years the OECD has revised upwards its overall economic forecasts

And Japan and Germany, which have been hit hard by the collapse of world trade, are expected to decline more sharply than the UK.

However, the OECD, which represents the 30 richest industrialised countries, has detected signs of stronger growth, particularly in the US and China, than previously thought.

The OECD adds that recovery is likely to be "weak and fragile" for some time, with rich country growth of just 0.7% next year, compared with its previous forecast of a contraction of 0.1%.

Signs of hope

"It looks like the worst scenario has been avoided," the OECD said.

"Even if the subsequent recovery may be slow, such an outcome is a major achievement of economic policy."

The OECD says that not only have its growth projections been revised, but the risks that things might be worse than expected are lower.

It says financial conditions might improve more quickly that it has assumed, although there is still a risk of an adverse reaction in bond markets to the high levels of government debt.

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