LONDON (Reuters) - The risk that Britain's economy will slide into recession in the next 12 months has edged up, and this might prompt the central bank to boost its asset purchase programme again to support the economy, a Reuters poll showed on Wednesday.
The poll of more than 40 economists, taken November 4-9 found a marked downgrade in growth expectations and gave a significant 40 percent chance of recession in Britain in the next year.
Going by previous Reuters polls, when the chances given of a recession rise to 40 percent the economy will almost certainly tip into one if it has not already done so.
The last time economists predicted a 40 percent chance of a UK recession was in the July 2008 poll, just before the collapse of U.S. investment bank Lehman Brothers. The economy ended up shrinking by 2 percent in that quarter, the second that year, and kept on contracting until mid-2009.
"If you can't have a recession during the biggest financial crisis since World War Two, when can you have recession?" asked Alan Clarke, economist at Scotia Capital.
He put the odds of recession at three-in-four and has pencilled in two quarters of contraction, in the current quarter and early in 2012.
With a resolution to the debt crisis in the euro zone, Britain's main trading partner, evading Europe's leaders and recent dismal economic data out of the UK, its outlook over the next few quarters looks bleak at best.
"For the time being it looks as though the UK might avoid a recession but it could be very close," said Philip Shaw, chief economist at Investec.
"If the euro zone crisis lasts considerably longer, then the UK and the rest of Europe will be in recession possibly throughout most of 2012."
Europe's leaders face an uphill task to contain the rapidly deteriorating situation in the euro zone. After Greece's political drama last week, Italian Prime Minister Silvio Berlusconi's promise to resign has failed to raise optimism.
On Wednesday, Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting investors' concerns that they may not get their money back.
The poll is the first in 20 conducted by Reuters to predict the UK economy will stagnate in Q4 2011. The October poll predicted growth of 0.2 percent in the same quarter.
The outlook for 2012 has also deteriorated dramatically, with economists slashing their forecasts by more than half to 1.0 percent from 2.2 percent just seven months ago.
The Office of Budget Responsibility said in March the economy would grow by 1.7 percent in 2011 and 2.5 percent in 2012. Whether it will slash those forecasts as much as economists have will be seen in its November release.
Growth in Britain's dominant services sector slowed more than expected in October, adding to signs the country risks slipping back into recession as manufacturers are already slamming the brakes on production.
Data released on Tuesday showed that industrial output in Britain had flatlined in September and retail sales dwindled last month, raising concerns the economy might grind to a halt in the last quarter this year.
With the domestic scenario looking increasingly dire and a global economic slowdown on the cards, policymakers and the government face the tough task of supporting the faltering economy despite the government's aggressive budget deficit-reduction plan.
The effects of a slowing economy are clearly visible.
HSBC (HSBA.L) said on Wednesday that costly new capital rules might force it to leave Britain, a threat it has made before, but which this time came with a bigger-than-expected fall in profit and a warning of "very challenging" conditions ahead.
With monetary policy options running out, the Bank of England expanded its quantitative easing (QE) programme of asset purchases to 275 billion pounds in total last month to help the economy.
But economists said it won't end there.
Twenty of 23 respondents said the Bank will increase its asset purchases in future to an estimated 325 billion pounds -- unchanged from a poll taken last week -- with most expecting it to happen in the first quarter of 2012.
"We think it's very likely in February there is no material improvement in the economic outlook and therefore the Monetary Policy Committee sanctions more QE," said Shaw.
Economists have also revised up their inflation predictions, forecasting a rise to 4.5 percent this year before a fall to 2.7 percent in 2012. In the last poll inflation was seen at 4.4 percent and 2.6 percent.
(Polling and analysis by Ruby Cherian and Ashrith Doddi in Bangalore; Editing by Catherine Evans)