MercoPress. South Atlantic News Agency

CBI says British economy will shrink 3.3% this year

The British government will have to borrow almost £100 billion more than previously forecast as it tries to bring a deeper-than-expected UK recession under control, business leaders warned.

In its latest dire warning on the economy, the CBI business group said the economy will shrink by 3.3% in 2009, compared with its November forecast of a 1.7% contraction. It also predicted State borrowing would be much higher than Chancellor Alistair Darling forecast in his Pre Budget Report last year, as the impact of the recession and the fiscal stimulus "take a toll on the public finances". The CBI said borrowing is expected to reach £149 billion in the 2009/10 financial year, or 10% of gross domestic product (GDP), compared to the £118 billion announced by Mr Darling. In the following year the Chancellor said borrowing would reduce to £105 billion, but the CBI expects it to rise again, to £168 billion, or 11.8% of GDP. Ian McCafferty, CBI chief economic adviser, said: "You would have to go back a long way before you found a deficit as high as 10% of GDP. In recent years we have seen deficits of around the 3% mark as being strongly sustainable." But he said many countries had been forced to revise their projections down in recent months as the severity of the recession became apparent. "I think circumstances have changed. The Pre Budget Report was done in October, November and we have seen a dramatic and global change in conditions, literally in the last six to eight weeks," he said. "Given the rapid contraction in global economic activity and the continuing credit squeeze, we believe the UK will be mired in a deep recession for the whole of 2009, lasting six quarters in total and accompanied by a significant rise in unemployment." The CBI revised its joblessness forecast upwards to a peak of just over 3 million in 2010. Average earnings growth is expected to drop in the first three quarters of this year to a low of 1.1%, as people become increasingly prepared to accept pay freezes and cuts. Wages are only predicted to return to the current level of growth - 2.5% - in the last quarter of 2010.