September 14, 2008 / 11:27 PM / 11 years ago

Mild recession seen in second half of 2008

LONDON (Reuters) - Britain is heading for a shallow recession in the second half of this year and next year’s economic growth will be the weakest since 1992, the Confederation of British Industry said on Monday.

Pedestrians walk past a shop window during the summer sales in central London July 31, 2008. REUTERS/Alessia Pierdomenico

The CBI cut its growth forecast for this year to 1.1 percent from 1.7 percent and slashed its 2009 forecast to 0.3 percent growth from 1.3 percent, urging the Bank of England to cut interest rates to 4.5 percent from 5 percent in November.

The CBI expects GDP to contract 0.2 percent on the quarter in the three months between July and September and 0.1 percent in the fourth quarter, with contraction probably spilling over into next year before the economy starts to recover.

“Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived,” the CBI’s Director-General, Richard Lambert said.

“This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged. Although the credit crunch will be with us for some time, conditions are set to improve later in 2009. The Bank should have leeway to cut interest rates.”

Easing commodity prices and a weaker economy mean that inflation will fall back quite rapidly over 2009 and near the Bank’s 2 percent target in the fourth quarter of 2009 after peaking at around 4.8 percent this year, the CBI said.

Inflation could then undershoot the Bank’s target in 2010, making room for rates to be cut to four percent by next spring.

“The Bank of England’s hands have been tied in recent months by the relentless rise in inflation,” Ian McCafferty, CBI Chief Economic Advisor.

“But with oil prices heading lower, very weak economic activity for a number of quarters, and little evidence of wage pressure, interest rates cuts will soon be justified.”


Last week Bank Governor Mervyn King emphasised the Bank’s role as a short-term helper to banks facing difficulties in the face of the credit crunch, not a permanent or long-term source of funding. Lambert lent his support to this position, urging limited intervention from the central bank.

“(The Governor) seems to be on the mark ... Intervention to support vulnerable citizens is one thing but to try and stand up against the weakness of the housing market is another,” he said.

Lambert also said he was beginning to hear anecdotes from small to medium sized businesses that they were finding credit difficult to obtain.

The CBI forecasts showed unemployment breaching the 2 million mark in 2009, with a jobless rate of about 6.5 percent.

Housing, construction, retail and durable goods sectors, particularly furniture, were seen suffering most job losses, McCafferty said.

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