UK 'Already In Recession', Forecasters Say

Britain's economy is already in recession, and is due to shrink by 1% in the next year, according to expert analysts.

The Ernst & Young ITEM Club said the UK economy has "deteriorated dramatically" in the past three months and will fall by 1% in the next 12 months, before it will recover in 2010 by only 1%.

The ITEM club, which uses the Treasury's own model for its prediction, says the credit crunch will hit Britain "very hard".

House prices will be 14% below their 2007 peak by the end of 2008 and will decline by a further 10% next year.

Chief Economist Peter Spencer said: "We now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events."

He added: "The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy."

ITEM are also forecasting that with a contracting economy, employment and investment will fall, and household incomes will remain flat for the next 12 months. Unemployment could hit 2.2 million by the end of 2009, while consumer confidence would also be hit, with spending set to fall by 1.2% next year.

However, the one bright spot in the forecast is that inflation will continue to fall, as the Bank of England cuts heavily in the face of recession.

Meanwhile inflation, which hit 5.2% last month following increased gas and electricity prices, is expected to fall back to the BoE’s 2% target. This has been helped by decreases in the price of oil and food.

"Inflation is now close to its peak," Mr Spencer said. "Oil prices have practically halved in value since their peak three months ago and a slowing economy is easing inflationary pressures."

He added: "With inflation set to start tumbling by the end of the year, the Bank now has room for further cuts as early as next month.

"We see the base rate falling to 3% next year."

(JM)