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CBI: UK economy to take further plunge

The recession will last throughout 2009, and businesses will continue to cut investment, according to a bleak forecast by the Confederation of British Indistry (CBI) today.

The CBI's latest economic forecast predicts the recession, which began in the third quarter of 2008, will last throughout 2009. The economy is expected to contract by 3.3% and unemployment will reach close to 2.9M by the end of the year.

Public finances will suffer, with net borrowing for 2009/10 expected to reach £149bn and £168bn in 2010/11, which represent 10.6% and 11.8% of GDP respectively.

After six quarters of negative growth, the economy is expected to stabilise early next year with the recovery building throughout 2010.

According to director general of the CBI Richard Lambert, "In recent months we have seen a slew of gloomy economic data from across the globe, showing world economic activity plunging sharply. Faced with a global confidence crisis, a rapid fall in demand and credit constraints, UK firms have been forced to scale back investment and cut jobs.

"The outlook remains extremely uncertain so forecasting remains especially difficult. Ultimately the severity of this recession will depend on the speedy implementation of the Government’s measures to unblock the credit markets and the success of various global stimuli packages in repairing business and consumer confidence.

"However, during the second half of the year the impact of interest rate cuts, falling inflation, the relative weakness of Sterling, plus the fiscal boost, should start to have a stabilising effect."

The CBI predicts the economy will contract by a cumulative 4.5% over the six quarters of negative growth. GDP growth for 2009 has been revised down from -1.7% in November to -3.3%. In 2010, GDP growth is expected to be 0.0 per cent.

Low energy prices and the recent VAT cut will introduce deflation of -0.1% in the third quarter of this year. Interest rates are expected to stay at a very low level until the end of 2010.

As the recession deepens, unemployment is expected to rise sharply over the course of 2009. The CBI predicts unemployment will peak at just over 3M - 9.6% in the second quarter of 2010.

Businesses investment is expected to shrink by 9.2% in 2009 and 1.7% in 2010.

CBI Chief Economic Advisor Ian McCafferty, said: "The crisis of confidence caused by last October’s financial turmoil resulted in a sharp and sudden fall in global output, including across the emerging economies.

"Given the rapid contraction in global economic activity, and the continuing credit squeeze, we believe the UK will be mired in a deep recession for the whole of 2009, lasting six quarters in total and accompanied by a significant rise in unemployment.

"The most urgent requirement is to get the various credit support schemes, announced recently, underway. Faced with continued uncertainty about access to credit, firms will continue to take drastic action to protect their businesses. But if we can get credit flowing across the economy, the considerable monetary and fiscal stimuli already in the pipeline should start to feed through later in the year and provide the pre-conditions for an eventual recovery through 2010."

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