Further interest rate cuts by the Bank of England are unlikely to prevent Britain’s economy from sinking deeper into recession next year than chancellor Alistair Darling forecast in his pre-Budget report last month.
The warning came from the independent National Institute for Economic and Social Research (NIESR) with an estimate that the economy declined by a full percentage point in the three months to October.
The think tank had previously estimated the slowdown at 0.8 per cent.
“The figures make clear that the rate out output decline is accelerating,” the respected NIESR commented. “There is every reason to believe that the output decline in the fourth calendar quarter will be larger than one per cent in magnitude.
“The Government faces a real risk that, despite the measures it took in last month’s Budget, output will fall more sharply than it expected to the end of next year.
“The main problem that it needs to address very urgently is the availability of bank credit. Further interest reductions are unlikely to have much effect.”
The latest official numbers from National showed the economy shrinking by 0.5 per cent between July and September.
In a separate forecast, the consultants Global Insight, agreed with the NIESR’s prediction of a one per cent decline in the final three months of this year, but added the prospect of a “substantial contraction” in the first half of 2009.
“Consequently, we forecast gross domestic product to contract by 2.0 per cent in 20098 after expanding by just 0.7 per cent in 2008,” Global Insight added.
“There is a very real likelihood that the UK will see a period of deflation in 2009, even though consumer price inflation was still up at 4.5 per cent in October.
The inflationary impact of the weaker pound would be more than offset by a slower economy, moderate pay and waning energy and food prices, it argued.
“Consequently, UK consumer price inflation is likely to turn negative for a time in the second half of 2009 and to average just 0.6 per cent over the year,” the consultancy concluded.
“Consumer price inflation should become positive again as VAT is put back up in January, 2010.”