Recession to be ‘sharp’ but ‘short’

13 November 2008

The Chancellor, Alistair Darling has forecast that the looming recession will be painful but that it should be over by 2010.

In a press interview, Mr Darling conceded that the UK was heading for a recession, although 2010 should see a return to economic stability and growth.

It is thought that Mr Darling will indicate a significant rise in public borrowing in his pre-Budget Report, due for 24 November, climbing from £43 billion to £65 billion.

Yet to complete its growth forecasts, the Treasury will probably concur with the Bank of England’s announcement this week that next year will witness a 1.3 per cent contraction in the economy.

However, growth is expected to recover to 1.7 per cent in 2010 and to surge to 3 per cent in the following year.

The Chancellor may point to a dramatic slide in government revenues – corporation tax could net £15 billion less than had been hoped for, while stamp duty is likely to yield only half of the expected £13.5 billion – as the main reason for increased government borrowing.

Mr Darling hinted that higher borrowing may be used to fund short-term tax cuts but that taxes could rise again in future financial years.

He said: “It is right to let borrowing rise. It is also important that we come back into balance over the medium term. The basic principle is to support the economy now but you have got to make sure you live within your means.”

Meanwhile, business has reacted to the prediction by Mervyn King, the Governor of the Bank of England, that inflation could slip to as low as 1 per cent next year, posing the risk of deflation, by demanding further rate cuts.

David Kern, the economic adviser to the British Chambers of Commerce, said: “The Governor’s comments confirm that the UK is facing a deepening recession. UK annual CPI inflation is set to fall well below target over the next 18 months, with a distinct possibility that we will face temporary deflation.

“It is important that the MPC perseveres with interest rate cuts over the next few months. We expect rates to come down to 2 per cent early in 2009, and there is a strong case for reducing rates further to 1.5 per cent, or even 1 per cent, in the middle of 2009.”