Employers forecast severe UK downturn

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Britain is set to enter a recession as severe as that of 1991, with the economy shrinking by 2.5 per cent from its peak before reaching a trough late next year, according to a sharply revised forecast from the CBI employers’ body.

Unemployment is expected to hit 9 per cent by 2010, leaving nearly 3m people out of work. Next year the economy is expected to contract by 1.7 per cent, against a growth forecast of 0.3 per cent made in September.

The CBI took the unusual step of issuing a revised forecast just two months after its outlook in September predicted a short, shallow recession for the second half of this year.

Ian McCafferty, chief economic adviser to the CBI, said the financial crisis that emerged just days after it made its most recent call on the economy had dramatically changed the picture for business.

“The first thing that has changed is business confidence,” Mr McCafferty said. The credit crisis that followed the collapse of Lehman Brothers in September had led to “significant fears” among businesses that they would be unable to raise cash on affordable terms, if at all.

“Since October’s financial turmoil, companies have started to report that, for the first time, they are finding it increasingly difficult to access capital. If this were to be more than a temporary phenomenon, it would result in otherwise healthy companies going to the wall for lack of short-term finance. This would have serious implications for both employment and investment.”

Mr McCafferty said the revised CBI forecast assumed that the extraordinary measures the government had taken to shore up the nation’s banking system did restore order in the credit markets. If these proved ineffective, then the economic outlook “would have to be revised to the downside”.

“The jury is still out about whether the government’s interventions so far in the financial sector will be successful,” said John Cridland, CBI deputy director-general. “It is unclear how the banks will be able to deliver for business over the next few months.” He cited anecdotal evidence that companies were having to pay higher up-front fees for finance and seeking a wider group of borrowers in order to meet financing needs.

The CBI’s warning comes as a growing number of companies report that credit insurance is being withdrawn from their suppliers. A host of retailers are reporting similar difficulties that could force some of the UK’s largest employers to either find the cash to pay for goods up-front or scale back production and sales.

Mr Cridland said the CBI expected the Bank of England to cut rates further, perhaps by half a percentage point in December. Eventually, he said, they might fall as low as 1.5 per cent.

But he defended the Bank’s decision to hold off cutting rates as signs pointed to sharply rising inflation through the summer. “We were as concerned about inflation as anybody,” he said.

Mr McCafferty signalled that the CBI broadly supported the idea of government stimulus for the economy, with several caveats. Fiscal loosening, he said, should be “targeted, short term and temporary”.

Moreover, he said, it should be accompanied by “new fiscal rules that give international investors confidence going forward”.

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