Britain's economy will shrink by 4.3 percent this year, its fastest pace of decline since World War Two, and stagnate in 2010, top international researchers said on Wednesday.
The Organisation for Economic Cooperation and Development, a Paris-based think-tank funded by 30 countries including Britain, said the British government had little room to spend more money to soften the economic downturn, and that the efficacy of the Bank of England's quantitative easing policy was unclear.
"Continued financial sector weakness, further declines in house prices, a weak global economy and sluggish income growth are projected to depress output through 2009, as in most OECD countries," the OECD said in its quarterly economic outlook.
Unemployment is likely to rise towards 10 percent in 2010 from a current level of 7.2 percent, the report added.
The OECD's 2009 forecast is bleaker than in its last outlook in March, when it predicted the British economy would shrink by 3.7 percent, but it is fractionally more upbeat about 2010, seeing output unchanged rather than contracting by 0.2 percent.
"The pickup will be sluggish, as the adjustment of households' and firms' balance sheets and expected reductions in the size of the financial and housing sectors will take considerable time," the OECD said.
Britain's downturn is sharper than the United States', where the economy is forecast to shrink by 2.8 percent this year, but less severe than in Japan and the euro zone, where output is seen falling by 6.8 percent and 4.8 percent respectively.
The OECD forecast that Britain's fiscal deficit would hit 14 percent of gross domestic product in 2010 — slightly higher than the government's forecast for a 13.3 percent public sector net cash requirement — and said there needed to be clearer plans to rectify this.
"Public finances have deteriorated sharply … curtailing the possibilities for additional fiscal stimulus. To improve stability, the government should continue to develop a concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold," the report said.
Moreover, the likely success of any expansion of the Bank of England's 125 billion pound asset purchase scheme was also hard to gauge, the OECD said.
"Further quantitative easing could help cushion the recession, but the effectiveness of these measures remains uncertain. Quantitative easing is more likely to be effective if the scope of future central bank actions is clearly signalled," the report noted.
