Unemployent to drag UK further into Recession

The financial turmoil and dramatic drop-off in business conditions over the past two months have darkened the economic outlook for 2009 even further, the Confederation of British Tndustry (CBI) warned today.

In its revised economic forecast, the CBI predicts that the recession which it says, started in the third quarter of 2008 will now run for most of 2009 and see unemployment peak close to 2.9m. Some unofficial figures already report unemployment to be in excess of 3 million. Officially Unemployment is expected to reach the two million mark by the end of 2008, with the jobless rate rising to 6.5%. The number out of work is currently expected to peak at around 2.9 million (9%) by mid 2010.
With this in mind it would be prudent for those still in work to purchase income payment protection insurance.

The CBI has downgraded its growth predictions for 2008 and 2009, following the severe impact on confidence and business activity from the financial turmoil in October 2008. GDP growth for 2008 has been revised down from 1.1% to 0.8%, and in 2009 the CBI now expects the economy to contract by 1.7%, against its forecast in September of 0.3% growth. These figures are closely paralleled to those of the Treasury predictions
The economy is expected to shrink quarter-on-quarter by 0.8% between October and December this year, and to contract again for a subsequent three quarters before beginning a slow recovery through 2010.

As the economy slows sharply over the coming year and commodity prices continue to ease, CPI inflation is expected to fall from 4.2% this quarter to 1.7% by the end of 2009, undershooting the Bank of England’s 2% target. Into 2010, inflation is likely to fall back further to a low of 1.1%, averaging just 1.2% over the year.
The drop in inflationary pressure will give further room to the Bank to make a series of rate cuts over the coming six months to bring the Bank rate to possibly as low as 1.5%.

John Cridland, CBI Deputy Director-General, said:
“Since the last forecast in September the banking system has come under immense strain, sending consumer and business confidence has plummeted in its wake. Given the speed and force at which the economic downturn has occurred, we have reassessed and downgraded our expectations for UK future economic growth. But the fast-moving and global nature of this crisis means it is impossible to look far ahead with any certainty. What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting.
An unwelcome consequence of the downturn will be a significant loss of jobs, many of them in sectors that have been relatively insulated until now.”

Lack of confidence among consumers will dampen household spending and the CBI predicts that household consumption will contract by 1.8% in 2009.

Investment forecasts have also been downgraded on the back of the falls in business confidence. The CBI predicts fixed investment will shrink by 3.8% in 2008 and 10.5% in 2009.

The CBI estimates that public borrowing will increase sharply during the recession. Net borrowing for 2008/09 is expected to hit £69.9bn and £93.8bn in 2009/10, which represent 4.8% and 6.4% of GDP respectively.

Ian McCafferty, CBI Chief Economic Adviser, said. “This latest forecast shows that 2009 is going to be a very tough year for business, with the sharpest fall in GDP since 1991. Most worrying are the increasing signs that the credit crunch is now reaching the corporate sector. Since October’s financial turmoil, companies have started to report that, for the first time, they are finding it increasingly difficult to access capital.
If this were to be more than a temporary phenomenon, it would result in otherwise healthy companies going to the wall for lack of short term finance. This would have serious implications for both employment and investment.”

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