Britains economy faces a tougher year than previously thought but will level out at the end of 2009 as stimulus measures including the Bank of Englands drive to inject billions of pounds pay off, a Reuters poll showed. Economists in the poll, taken March 6-11, forecast the UK economy would shrink 3.0 percent this year, according to the median estimate.
That is down from a 2.9 percent contraction forecast last month, and they see growth of just 0.4 percent in 2010, down from Februarys 0.6 percent forecast. This represents the 14th consecutive month that the 2009 forecast has been downgraded. Medians show the economy levelling out in the last quarter of 2009, the same as last month, with growth beginning in the first quarter of next year. However, 12 of 26 economists saw growth in the last three months of this year.
"Its the bottoming out of the economy; things wont streak away by any means but we do have something of a recovery," said Simon Hayes at Barclays, who sees 0.2 percent growth quarter-on-quarter in October-December this year. The UK economy contracted 1.5 percent in the last quarter of 2008, the deepest contraction since 1980, confirming the first recession in the UK since the 1990s.
Recent data suggest the economy is in deep trouble. Industrial output shrank at its fastest pace since 1981 in January, despite a 20 percent fall in sterling in the last three months which should benefit exports, while the trade deficit widened. The economys performance contrasts with 3.0 percent growth in 2007 and 0.7 percent last year, but forecasts were relatively wide, ranging between a 1.3 percent and 4.1 percent contraction this year.
The slowdown will have a knock-on effect with unemployment levels seen reaching 10 percent next year, the same as predicted last month, as firms slash jobs to save costs. The Bank of England has chopped 400 basis points from interest rates since October, bringing them to just 0.5 percent, a record low in the banks 315-year history. However, the poll found that the central bank has finished wielding its axe.
Median forecasts of over 60 economists show Bank Rate on hold until the end of the second quarter in 2010, with an upturn in rates seen a quarter earlier than in a poll taken last week. "The cut in policy rates by 50 basis points to 50 basis points presumably takes us to the effective floor. It makes sense to assume that they stay there for some time," Credit Suisse economists said.
Rates are now so low the BoE has essentially run out of room to use them to boost the economy further. It has announced plans to inject up to 75 billion pounds through quantitative easing measures - buying assets of the open market to add to the money supply. Economists think this will push inflation higher this year, and faster than thought last month, but it will remain well below the central banks 2.0 percent target.