Britain's recession will be much deeper than previously expected but the worst is behind the struggling economy and an end to the downturn will come a little sooner than earlier predicted, a Reuters poll showed. Around 40 economists in the monthly poll, taken May 8-13 before the Bank of England's May Inflation Report was due, forecast the UK economy would shrink 4.0 percent this year and grow just 0.3 percent next year, according to median estimates.
That is considerably worse than the 3.6 percent contraction for this year and 0.4 percent growth for 2010 forecast only last month and represents the 16th consecutive month of Reuters polls that the 2009 GDP forecast has been downgraded. Forecasts were wide, ranging from a 2.5 percent contraction to a 4.5 percent contraction this year. However, 19 of 21 economists said the worst of the recession in the UK had already passed and median forecasts now saw a flat fourth quarter, compared to the 0.1 percent contraction seen last month.
"We believe that the first quarter saw the steepest decline in UK GDP and the rate of contraction will progressively ease through 2009," said Howard Archer at IHS Global Insight. The Organisation for Economic Co-operation and Development said on Monday that while the world's major economies continued to weaken in March the UK was showing tentative signs of a pause in the economic slowdown.
British retail sales rose at their fastest rate in three years in April, helped by the timing of Easter, and there were vague signs of an improvement in the housing market where prices fell at their slowest pace in 15 months in the three months to April.
However, manufacturing output fell at its fastest rate in the first three months of 2009 since records began in 1948, although even this was better than expected, and data on Tuesday showed unemployment reached a high not seen in over 10 years. The forecasts are a long way from what now seems giddy growth of 3.0 percent in 2007 and 0.7 percent expansion in 2008 and cast doubts over the government's own expectations for a 3.5 percent contraction this year.
The downgrades come after data showed the economy shrank by 1.9 percent in the first three months of 2009 - much more than expected and its sharpest rate of contraction in 30 years - despite a more than 25 percent rally in the UK leading share index in recent weeks.
The Bank of England held rates at the historic low of just 0.5 percent this month but announced a 50 billion pound top-up to its programme of asset purchases, taking its fund up to 125 billion pounds. The BoE had been prevented from cutting rates as inflation was running at 5.2 percent last September but has slashed them by 450 basis points since October and embarked on an unprecedented programme of quantitative easing in a bid to breathe life into the economy.
The median forecast of over 50 economists is that the bank will not change rates until next July at the earliest, the same as in an April 30 poll. The central bank has said it expects inflation to fall below its two percent target and these views were echoed by economists in the poll that saw inflation at just 1.6 percent this year and next.
This compares to 1.2 percent and 1.6 percent for 2009 and 2010 respectively in last month's poll. The bank published its quarterly Inflation Report on Wednesday, saying it saw inflation at just 1.2 percent in two years time and that the economy will shrink sharply in the coming months before recovering at a slower pace than it previously thought.
Eleven of 19 economists said the biggest concern for the UK economy was a period of deflation but 8 said rapidly rising inflation was the bigger worry. Economists were evenly split in last month's poll. "Our answer is finely balanced. We see prolonged deflation as the greatest risk in the short term, but rapidly rising inflation as the greatest risk further out," said Andrew Brigden at Fathom Consulting.
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