UK economy set to shrink 4.5% this year

A swine flu outbreak could knock an additional 3% off GDP, say economists

Britain’s economy could shrink by 4.5% this year, the largest decline in a single year since 1945, and a worst case swine flu outbreak could knock another 3% off UK output, economists have warned.

The warning of a 7.5% decline in GDP came as Ernst & Young’s ITEM Club released its summer forecast. The team of economic experts also predicted a subdued 0.5% recovery in 2010.

‘Recent hopes of recovery are now running ahead of reality. We will not see a sustainable improvement in the UK economy until world trade starts to pick up,’ cautioned ITEM.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, warned: ‘There is still a serious chance of a relapse.’ If the worst case scenarios of the threat of swine flu are fully realised, GDP could fall by as much as an additional 3% this year and another 1.7% in 2010, he said.

Adding: ‘The only ray of hope is a potential recovery in world markets, which UK exporters can exploit because of the low level of the pound.’

“There is still a serious chance of a relapse.
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club

The gloomy forecast is the result of constrained credit and lack of competition in the banking sector leading to expensive lending to consumers and corporates.

It is unlikely that banks will be able to meet the demand for credit in the next three months, explained Spencer.

Corporate liquidity and borrowing remain worryingly weak, while net lending to the housing market remains close to zero, said the economists.

ITEM forecast that interest rates would be kept at 0.5% for the next 18 months.