Steepest GDP decline since 1945 predicted

UK GDP growth could contract by 4.5% according to the latest Ernst & Young ITEM Club forecast – the largest decline in a single year since 1945.

The forecast however predicts a subdued recovery of 0.5% in 2010, although ITEM cautions that recent hopes of recovery are now running ahead of reality.

It predicts that we will no see a sustainable improvement in the UK economy until world trade starts to pick up.

Meanwhile, GDP could fall an extra 3% if swine flu worst case scenarios are fully realised.

ITEM forecasts that base rates will continue to be pinned to the floor for the next 18 months while the consumer recession continues to intensify due to company cut-backs in employment and earnings.

However, York University’sProfessor Peter Spencer, who is chief economic advisor to ITEM, said that the flexibility of the labour market meant that the rise in unemployment had not been as bad as previously thought.

“Employees seem to have learnt from the recession in the 90s that a slash and burn approach can turn out to be a handicap once recovery begins,” he added.

He continued:”The economic patient has been in trauma, but thanks to the paramedics at the Treasury and the Bank of England, which pumped billions of pounds worth of medicine into the economy, the patient has been stabilised for now.

“But it remains unclear how quick and complete recovery will be and there is still a serious chance of a relapse.”

He added that it was hard to see any solid grounds for sustained optimism at the moment and that the only ray of hope is a potential recovery in world markets.

Prof Spencer said: “Unfortunately it is hard to see any very solid grounds for sustained optimism at the moment.

“The only ray of hope is a potential recovery in world markets, which UK exporters can exploit because of the low level of the pound.”