MercoPress. South Atlantic News Agency

UK unemployment forecasted 5% as recession advances

The United Kingdom is already in a recession which could last for three quarters and will see unemployment rising to 5%, according to the Ernst & Young ITEM club, reports the British press.

Big redundancies in the UK so far en confined in the finance and housing industries, but the economics group now expects these to become more widespread as the credit crunch seeps into the wider economy. ITEM is forecasting that unemployment will be 5% by the end of 2010 (reaching 7.8% on the Labour Force Survey), double the 2.5% level at the end of last year. The prediction comes as the group expects the UK economy to bottom out in the second half of next year and expects a weak recovery in 2010. UK GDP will fall by 1% next year, the first year of negative growth since 1992 and will grow by only 1% in 2010, according to the group's latest report. "The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy", said Peter Spencer, Chief Economist to the Ernst & Young ITEM Club. But with plunging interest rates, falling inflation, a fundamentally strong economy and some sort of stability in the banking system, he expects the recession to be a relatively short and shallow downturn. The relief felt worldwide over government interventions of recent days should not obscure the facts that there remain major issues with UK and international credit markets. The supply of credit to companies and households is likely to remain severely restricted for the foreseeable future The UK is over reliant on international wholesale banking deposits and does little to encourage saving by consumers. Short term, this means UK banks and their borrowers will remain on the life support provided by the Bank of England. Longer term regulators and politicians will have to look at breaking this addiction to borrowing,' said Spencer. The weakness of the world economy has the beneficial effect of reversing some of the recent commodity price inflation, making the CPI much less of a concern than it had been as recently as three months ago, the group said. Oil prices have practically halved in value since their peak three months ago and a slowing economy is easing inflationary pressures. "With inflation set to start tumbling by the end of the year, the Bank now has room for further cuts as early as next month. We see the base rate falling to 3% next year", Spencer said. ITEM forecasts that UK corporate profitability will continue to hurt, triggering widespread reductions in investment and employment. Business investment is already subsiding and ITEM expects it to fall back by 5% next year. All this means real disposable incomes will remain flat again next year before a modest rise in 2010. With employment falling, housing and equity prices lower and credit increasingly hard to find, the forecast shows consumption falling back by 1.2% in 2009 before staging a weak recovery in 2010. In the light of the deteriorating economic environment, ITEM expects that UK house prices will fall back 14% by the end of 2008 and a further 10% next year before stabilizing in 2010. With the expectation that the availability of mortgage credit will remain very tight and little sign that lenders will pass on all of the interest rate cuts to borrowers, ITEM predicts a worrying circle of diminishing consumer confidence and falling house prices. Housing investment, transactions and all of the associated activity a growing housing market brings to the economy will be in deep freeze until the bottom of the market is reached and confidence returns, it added. The ITEM group - sponsored by Ernst & Young - was founded in 1977 by a number of major companies who wanted to share the cost of economic forecasting. Its members span a range of industry sectors.