Britain's economy will shrink by 3.7 percent this year, its fastest pace of decline since World War Two, and the government has little room for more fiscal support, top international researchers said on Tuesday.
The Organisation for Economic Cooperation and Development, a Paris-based thinktank funded by 30 countries including Britain, said the UK economy was likely to shrink by a further 0.2 percent in 2010, though a recovery should start later that year.
"Continuing financial sector weakness, further declines in house prices, and a weak global economy are projected to depress output through 2009. Policy support, combined with an easing in financial conditions should underpin a recovery during 2010," the OECD said.
Unemployment was likely to peak at 10 percent compared to its current level of 6.5 percent, the OECD added.
The OECD's forecast for British growth is slightly less grim than that for other big economies. It predicts the United States will contract by 4.0 percent, the euro zone by 4.1 percent and Japan by 6.6 percent next year.
This weak global outlook meant that the fall in sterling's value against other major currencies would bring little help to exports until demand improved elsewhere, the OECD said. For 2010 it forecasts no growth in the United States, a 0.3 percent contraction in the euro zone and a 0.5 percent decline in Japan.
The report said Britain's budget deficit, which is set to hit 9 percent of GDP this year, meant it had little room to soften the impact of the recession if it turned out deeper than expected.
"The room for additional fiscal manoeuvre to respond to worse-than-expected activity developments is therefore limited and new measures would need to be accompanied by detailed and credible fiscal consolidation plans, in order to ensure that confidence is not eroded," the OECD said.
Opposition politicians have criticised British Prime Minister Gordon Brown after Bank of England Governor Mervyn King made similar comments, especially as Brown is due to chair a G20 summit in London on Thursday to coordinate more international steps to tackle the global economic crisis.
But the OECD said that further fiscal stimulus may be justified in some circumstances.
"If economic circumstances deteriorate significantly more than projected, further fiscal measures would be warranted," it said in the report.
For now, Britain is implementing a discretionary fiscal stimulus worth 1.4 percent of GDP, on top of an increased number of social benefit payments.
"Automatic stabilisers" such as higher benefit payments and a fall in taxes from oil and finance were more to blame for the budget deficit than the fiscal stimulus, the OECD noted.
The Bank of England is also creating 75 billion pounds ($106.4 billion) of money to buy government bonds in a quantitative-easing programme to boost growth and stave off deflation, which the OECD said could help more than it had pencilled in.
"Monetary and fiscal policy could provide a stronger stimulus to growth, although the magnitude of their impacts, especially that of quantitative easing, are currently difficult to gauge," the OECD said.
