Forecasters say consumers will cut spending because of unemployment

A stark picture of the prospects for the UK economy has been painted by an independent group of economists.

The Centre for Economics and Business Research (CEBR) predicts the economy will shrink by 2.9% in 2009 – more than at any time since the 1940s.

It expects consumer spending to decline and investment in business to slump.

The forecasters say exporters will be helped by the slump in the pound’s value, but even their prospects will be held back by a global slowdown.

The CEBR’s research suggests the economy will contract by its largest amount since 1946, when the country was in the grips of mass de-mobilisation after the war.

The forecasters say the economy is undergoing a painful readjustment, as consumers cut spending because of rising unemployment.

But the big threat, they say, is a predicted collapse in business investment of 15% because firms will struggle to get finance.

Several analysts have made predictions of a 2.5% fall in GDP next year, but CEBR managing economist Ben Read told the Daily Telegraph: “It is easy to see that things could be even worse.

“Despite public declarations by the government that the banks ought to be lending more, it is clear the primary concern of many of our largest banks is to shore up their balance sheets and, for those on the end of government bailouts, to pay back their Treasury masters.”

If business investment was cut at the same time as consumers reined in their spending, then “a contraction of between 5% and 10% could be on the cards, setting the UK economy back by five years”, he added.

Earlier this week official figures confirmed the UK economy is sliding towards recession faster than was first thought.

Revised data showed a 0.6% decrease in output between July and September – the worst since 1990 and bigger than the 0.5% fall first estimated by the Office for National Statistics (ONS).

Chancellor Alistair Darling has said the UK will return to growth in the second half of 2009.

He predicts stimulus moves funded by extra borrowing – such as the VAT cut – will see a “shorter and shallower” slowdown than feared.