Britain's recession is far from over and will be much deeper than previously feared despite unprecedented stimulus measures from the Bank of England, a Reuters poll showed.
Over 40 economists in the quarterly poll, taken April 1-8, forecast the UK economy would shrink 3.6 percent this year, according to the median estimate. That is considerably worse than a 3.0 percent contraction forecast just last month.
It is better than the latest International Monetary Fund forecast of a 3.8 percent contraction but represents the 15th consecutive month of Reuters polls that the 2009 GDP forecast has been downgraded. Growth of just 0.4 percent is seen for 2010, in line with last month's prediction.
"Fresh waves of pessimism have formed surrounding UK economic prospects. There are no indications of a prompt recovery," said Philip Shaw at Investec.
The UK economy contracted 1.6 percent in the last quarter of 2008, the deepest contraction since 1980, confirming the first recession in the UK since the 1990s. And recent news suggests the economy is still struggling.
Data released on Tuesday showed British industrial output suffered its biggest annual drop in February since records began 40 years ago although figures last week showed the rate of contraction in the dominant service sector eased to its slowest pace in six months.
Medians show the economy beginning to grow again in the first quarter of next year. However, it was a close call, with almost half of the economists seeing at least stabilisation in the last three months of this year.
The economy's recent performance is a far cry from the heady growth of 3.0 percent in 2007 and 0.7 percent expansion in 2008. But forecasts were wide, ranging between a 1.3 percent and 4.5 percent contraction this year.
The slowdown is likely to have a knock-on effect with unemployment levels seen reaching 10 percent in 2010, as firms slash jobs in a battle to cut costs and stay afloat.
INFLATION INCREASE
The Bank of England was prevented from boosting the economy by cutting interest rates sooner as inflation was running at more than double its two percent target but it is seen at just 1.2 percent this year before moving up to 1.6 percent next year.
This compares to 1.0 and 1.6 percent respectively in last month's poll.
Nine of 18 economists said the biggest concern for the UK economy was a period of deflation but the other nine said rapidly rising inflation was the bigger worry.
That is more evenly split than results from across Europe and the U.S. where two-thirds said deflation was the bigger threat.
Inflation in the UK was at 3.2 percent in February — far higher than in the other G7 countries.
"Deflation is still a significant risk over the next six to nine months … Over the longer term, inflation is undoubtedly the bigger longer threat," said David Kern at BCC.
The BoE has decimated interest rates, chopping 400 basis points from rates since October, bringing them to a record low in the bank's 315-year history of just 0.5 percent, but the poll found the bank has finished wielding the axe.
Median forecasts of almost 70 economists show Bank Rate on hold at least until the end of the second quarter of next year, in line with a poll taken last week.
With rates at such a low level the bank is out of room to use them as a further stimulus and has embarked on a plan to inject billion of pounds through quantitative easing measures — buying assets on the open market to boost money supply.
