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British economy to shrink by 2.9 % in 2009: think tank

(Agencies)
Updated: 2008-12-26 20:41

LONDON -- British economy will shrink by 2.9 percent in 2009, the worst one-year fall in gross domestic product (GDP) since 1946, a leading think tank warned Friday in one of the gloomiest forecasts yet.

Shoppers on Oxford Street on December 23, 2008. The economy will shrink by 2.9 percent in 2009, the worst one-year fall in gross domestic product (GDP) since 1946, a leading think tank warned Friday in one of the gloomiest forecasts yet. [Agencies]

Analysts at the Centre for Economics and Business Research (CEBR) also said that if the financial crisis triggers a series of cutbacks, the economy could shrink by up to 10 percent, setting Britain back by five years.

The think tank said exporters have been helped by the falling pound but warned consumers will cut spending as unemployment rises. The biggest problem is likely to be falling business investment, it said.

Mark Pragnell, CEBR managing director, told BBC radio that he expects business investment to fall by 15 percent next year, or even by a third.

"That will have a significant impact on overall prosperity levels. We're anticipating 2009 to have GDP levels 2.9 percent lower than 2008. That'll be the worst one-year fall in GDP since 1946," he said.

The government predicts GDP to fall by 0.75 percent to 1.25 percent next year, although several analysts put the figure at 2.5 percent.

CEBR managing economist Ben Read told The Daily Telegraph: "It is easy to see that things could be even worse.

"Despite public declarations by the government that the banks ought to be lending more, it is clear the primary concern of many of our largest banks is to shore up their balance sheets and, for those on the end of government bailouts, to pay back their Treasury masters."

As credit remains tight, firms were likely to continue cutting budgets and staff, adding to cuts in consumer spending.

"If this deleveraging scenario occurs, a contraction of between five percent and 10 percent could be on the cards, setting the UK economy back by five years," Read told the Telegraph.

The economy shrank by 0.6 percent in the three months to September compared with the previous quarter, the Office for National Statistics said last week.

It will officially be in recession if the economy contracts again in the fourth quarter.