UK’s FSA warns recession may exceed forecasts

Britain is at risk of a deeper-than-expected recession as a continued dearth of bank credit exacerbates falls in house prices, consumer spending and business investment, the UK's Financial Services Authority said.

In a report outlining the main risks facing the UK economy and financial system in 2009, the FSA said on Monday that while economists on average expect the UK to contract by 2.2 percent this year before returning to growth in 2010, the weakened banking sector means this forecast may prove optimistic.

"The risks are weighted to the downside and, while the effects of fiscal stimulus and monetary easing remain unclear, the recession may be deeper and more prolonged than expected," the FSA said.

The watchdog highlighted the risk that a continued shortage of credit as risk-averse banks seek to repair their balance sheets may prompt a greater degree of retrenchment by businesses and consumers than in previous recessions.

"These self-reinforcing cycles exist in any economic downturn, but the crucial danger in the current crisis is that weakness in the banking system could stimulate and reinforce them," the FSA said.