U.K. Economy to See Worst Slump Since 1980, CBI Says

By Svenja O’Donnell

Feb. 16 (Bloomberg) -- The U.K. economy will shrink at almost twice the pace previously forecast this year as the credit famine plunges the nation deeper into the worst recession in almost 30 years, the Confederation of British Industry said.

Gross domestic product will contract 3.3 percent, instead of the 1.7 percent predicted in November, the biggest U.K. business lobby said today. By the end of 2009, the economy will have contracted for six consecutive quarters, it said.

“The world has changed dramatically,” Richard Lambert, the CBI’s director general, told reporters in London. “Faced with a global confidence crisis, a rapid fall in demand and credit constraints, U.K. firms have been forced to scale back investments and cut jobs.”

Prime Minister Gordon Brown has pledged billions of pounds to revive lending as a housing slump deepens and job losses mount. The CBI expects the economy to shrink 4.5 percent from the start of the recession in the third quarter of last year, only slightly less than in the early 1980s slump during Margaret Thatcher’s first term. Output will stagnate in 2010, it said.

Government net borrowing will balloon to 148.7 billion pounds ($211 billion) in the next financial year, or 10.6 percent of GDP, and then rise to 11.8 percent of GDP the following year, the CBI said in the forecasts. Chancellor of the Exchequer Alistair Darling said in November that borrowing would be 8 percent of GDP in the year ending March 2010.

Housing Slump

As banks rationed loans, home values slumped. The average price advertised by sellers in February recorded the biggest annual fall since at least 2002, declining 9.1 percent to 216,163 pounds, Rightmove Plc said today. In London, they fell 3.5 percent. Mortgage approvals stayed close to a decade-low in December, the Bank of England said on Jan. 30.

Enquiries from potential buyers are “being blunted by the mortgage famine,” Miles Shipside, Rightmove’s commercial director, said in a statement. “The financial sector needs to put its house in order before market recovery can truly begin.”

Still, asking prices in the U.K. rose 1.2 percent over the month, led by the West Midlands, Rightmove said. In London, they grew 0.3 percent.

House prices will probably decline 15.5 percent this year, the CBI said. Rightmove forecasts a 10 percent drop.

Unemployment will rise to more than 3 million by the second quarter of 2010, up from 1.97 million at the end of last year, according to the CBI. The inflation rate will drop to 0.1 percent in the third quarter of this year, the CBI said.

The recession will damage Britain’s long-term growth prospects, Oxford Economics said in a report today. GDP will grow 2.1 percent a year on average between the second half of 2006 and the final two quarters of 2018, compared with an average 2.9 percent expansion in the previous economic cycle, the report showed.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.