POLL-Chances of UK recession rise as economy stutters

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By Jonathan Cable (Reuters)

The chances of a British recession are rising as the economy grinds to a halt, compelling the Bank of England to cut interest rates early next year after inflation has peaked, a Reuters poll showed on Thursday.

The monthly poll, taken Sept. 4-11, gave a median forecast of a 55 percent chance the UK would skid into recession within the next 12 months, significantly up from 45 percent in last month's poll and above 50 percent for the first time.

"The latest data suggest that it is now slightly more likely than not that the UK could tip into at least a mild recession during the second half of 2008," said John Hawksworth, head of macroeconomics at PricewaterhouseCoopers.

Recession is typically defined as two consecutive quarters of contracting gross domestic product (GDP) and this is the first time this year economists answering that question have given it a more than 50 percent chance of happening.

The British economy is expected to expand just 1.1 percent in 2008 while growth will be just 0.7 percent in 2009, well below the 1.4 and 0.9 percent forecast last month and way down from the healthy 3.0 percent growth seen in 2007.

This represents the eighth consecutive month the median 2009 forecast has been downgraded.

However forecasts were wide, ranging between 0.5 and 1.8 percent for this year and between a 0.6 percent contraction and 2.7 percent growth for 2009.

The Organisation for Economic Co-operation and Development said last week the British economy was the only one of the G7 heading into recession, a view seconded by the European Union Commission on Wednesday. The downgrade to forecasts comes after a slew of indicators painted a gloomy outlook for the economy and official figures showed the economy ground to a halt in the second quarter.

Data released on Tuesday showed retail sales fell for a third month in August while house prices, a bedrock of consumer wealth, crumbled with the average number of sales per surveyor hitting a record low.

Meanwhile factory output fell 0.2 percent on the month in July, marking the longest stretch of monthly declines in seven years for British manufacturing, as high food and fuel prices force consumers to cut back on spending.

Bank of England Governor Mervyn King said on Thursday that a weak pound, which slumped to a two-and-a-half year low against the dollar on Monday, was adding to inflationary pressures.

However, a weak pound will make exports more attractive.

Britain's economy has been hit by a global economic downturn that started over a year ago with mortgage problems in the United States.

CUTTING RATES SOONER

The Bank of England held rates steady at 5.0 percent when it met earlier this month after making cuts in April, February and December, and markets see a further cut later this year as inflation begins to come under control.

Median forecasts from the poll however say the central bank will not cut rates until early next year to breathe life into a stuttering economy, but almost half of the economists polled — 36 out of 75 — see at least one cut this year.

Median forecasts show Bank Rate holding at 5.0 percent until year-end, down sharply to 4.5 percent by end-March, 4.25 percent by the middle of the year and then dropping to 4.0 percent by the end of the year.

This is the same as forecasts in a poll taken two weeks ago.

The bank is facing the dilemma of a slowing economy and rising consumer price inflation, which at 4.4 percent in July, was more than double the bank's two percent target.

The poll showed economists predict inflation will be at 3.8 percent this year and then slow to 2.7 percent in 2009, compared to 3.7 and 2.7 percent respectively in last month's poll.

The economists saw a sharp slowdown in inflation starting early next year to around 1.8 percent in the fourth quarter of 2009, giving the central bank some room to manoeuvre.

The price of oil has ebbed from highs of almost $150 a barrel, even slipping under $100 in recent days, and may provide some respite.

BoE Deputy Governor, John Gieve, said earlier this week that British inflation had not yet peaked and that while they had to be mindful of causing an unnecessarily sharp slowdown they could not allow high inflation to become embedded in the economy.