U.K. Economy Will Come Close to Recession, Ernst & Young to Say

By Jennifer Ryan

July 20 (Bloomberg) -- The U.K. economy will come close to a recession as tightening credit markets and faster inflation squeeze consumer spending, the Ernst & Young Item Club will say.

Growth will slow to 1 percent in 2009, down from an April forecast of 1.5 percent, the London-based research group, which uses the same economic model as the Treasury, will say in a report tomorrow. The U.K. will ``struggle to avoid a recession'' as expansion cools to 1.5 percent this year from 3 percent in 2007.

As the expansion cools and the housing market deteriorates, the inflation rate will hold above the government's 3 percent upper limit for the next 12 months, the group will say. The Bank of England will hold interest rates at 5 percent until slower growth eases price pressures.

``On the high street and in the housing market it is going to get a great deal worse before it gets better,'' Peter Spencer, economic adviser to Ernst & Young and a former Treasury official, says in the report, according to an e-mailed statement. ``The weakening economy should allow'' interest-rate cuts ``this winter.''

The group will say that house prices will fall 10 percent this year and a further 6 percent next year. Regions outside of London will bear the brunt of the deterioration.

The central bank's benchmark interest rate will fall to 4 percent by the end of next year, the group will say.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net