Britain’s economy will shrink by 3.7 per cent this year, its fastest pace of decline since the Second World War, while the Government has little room to stimulate activity, international researchers said yesterday.
The Organisation for Economic Co-operation and Development (OECD), a Paris-based think tank funded by 30 countries including Britain, said the UK economy was likely to shrink by a further 0.2 per cent in 2010, though a recovery should start later that year.
“Continuing financial sector weakness, further declines in house prices, and a weak global economy are projected to depress output through 2009,” the OECD said.
“Policy support, combined with an easing in financial conditions should underpin a recovery during 2010.”
Unemployment was likely to peak at ten per cent compared with a current level of 6.5 per cent, the report added.
The OECD’s forecast for British growth is slightly less grim than that for other big economies. It predicts the United States will contract by four per cent, the euro zone by 4.1 per cent and Japan by 6.6 per cent next year.
This weak global outlook meant that the fall in sterling’s value against other major currencies would bring little help to exports until demand improved elsewhere, the OECD said. For 2010 it forecasts no growth in the United States, a 0.3 per cent contraction in the euro zone and a 0.5 per cent decline in Japan.
The report said Britain’s budget deficit, which is set to hit 9 per cent of GDP this year, meant it had little room to soften the impact of the recession if it turned out deeper than expected.
“The room for additional fiscal manoeuvre to respond to worse-than-expected activity developments is therefore limited and new measures would need to be accompanied by detailed and credible fiscal consolidation plans, in order to ensure that confidence is not eroded,” the OECD said.
Opposition politicians have criticised Prime Minister Gordon Brown – who tomorrow will chair a G20 summit in London aimed at co-ordinating international moves to tackle the economic crisis – after Bank of England Governor Mervyn King made similar comments.
But the OECD said that further fiscal stimulus may be justified in some circumstances.
“If economic circumstances deteriorate significantly more than projected, further fiscal measures would be warranted,” it said yesterday.
For now, Britain is implementing a discretionary fiscal stimulus worth 1.4 per cent of GDP, on top of an increased number of social benefit payments.
“Automatic stabilisers” such as higher benefit payments and a fall in taxes from oil and finance, were more to blame for the budget deficit than the fiscal stimulus, the OECD noted.
The Bank of England is also creating £75 billion of money to buy government bonds in a quantitative-easing programme to boost growth and stave off deflation, which the OECD said could help more than it had pencilled in.
“Monetary and fiscal policy could provide a stronger stimulus to growth, although the magnitude of their impacts, especially that of quantitative easing, are currently difficult to gauge,” the OECD said.
“The world economy is in the midst of its deepest and most synchronised recession in our lifetime caused by a global financial crisis and deepened by a collapse in world trade,” it added.