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Recession to deepen, warns CBI

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A combination of a rapidly deteriorating global economy and the ongoing failure of UK businesses to get access to finance will mean that the recession is all set to worsen in 2009, the CBI has predicted.

In its latest economic forecast, the CBI said that it expected the recession to endure throughout 2009, with the economy shrinking by 3.3 per cent and unemployment hitting 2.9 million.

Recovery will only begin sometime early in 2010 after six consecutive quarters of negative growth.

During those six quarters, the CBI estimated that the economy will contract by a cumulative 4.5 per cent. In 2010, GDP growth is expected to be 0.0 per cent.

The severity of the recession, along with lower energy prices and the recent VAT cut, will push CPI inflation to a low of -0.1 per cent in the third quarter of this year. The rise in average earnings, too, will weaken to a low of 1.1 per cent by the end of the year as more and employees accept pay freezes and cuts.

Unemployment is expected to rise sharply during the course of 2009, the CBI said, peaking at just over 3 million (9.6 per cent) in the second quarter of 2010.

Business investment is set to decline, the CBI added, dropping by 9.2 per cent in 2009 and 1.7 per cent in 2010.

Public finances will suffer as well, the forecast continued, with net borrowing for 2009/10 expected to reach £149 billion and £168 billion in 2010/11.

Richard Lambert, the CBI’s director-general, said: “In recent months we have seen a slew of gloomy economic data from across the globe, showing world economic activity plunging sharply. Faced with a global confidence crisis, a rapid fall in demand and credit constraints, UK firms have been forced to scale back investment and cut jobs.

“Ultimately the severity of this recession will depend on the speedy implementation of the governmentπs measures to unblock the credit markets and the success of various global stimuli packages in repairing business and consumer confidence.”

Mr Lambert added: “However, during the second half of the year the impact of interest rate cuts, falling inflation, the relative weakness of sterling, plus the fiscal boost, should start to have a stabilising effect.”

Ian McCafferty, the CBI’s chief economic advisor, said: “Given the rapid contraction in global economic activity, and the continuing credit squeeze, we believe the UK will be mired in a deep recession for the whole of 2009, lasting six quarters in total and accompanied by a significant rise in unemployment.

“The most urgent requirement is to get the various credit support schemes, announced recently, underway. If we can get credit flowing across the economy, the considerable monetary and fiscal stimuli already in the pipeline should start to feed through later in the year and provide the pre-conditions for an eventual recovery through 2010.”