UK economy to shrink in 2009 as recession bites

LONDON (Reuters) - The UK is already in the grips of a recession and the economy will shrink in 2009 even though the Bank of England will slash interest rates further following the coordinated cuts by major central banks, a Reuters poll found.

The quarterly poll, conducted on October 9-16, found 23 of 24 economists said the UK was in recession. But they were split on how bad it would be compared with past recessions, with 8 saying it would be shallower, 7 average, and 6 deeper.

"I've got no problems with saying that (we are in a recession). In the '70s, '80s and '90s we had very deep recessions. I think this will be similar-ish to the early '90s, which wasn't quite as bad as the '70s and '80s," said Michael Saunders at Citi.

The British economy ground to a halt in the second quarter, even before events in financial markets over the last month sent consumer confidence plummeting and sparked widespread fears of a global recession.

Monetary Policy Committee member Andrew Sentance said on Monday Britain's economy was likely to shrink in the second half of this year and the chances of a severe downturn had increased.

According to median forecasts from the poll, virtually all collected after the G7 meeting at the weekend, the UK economy is expected to expand just 1.0 percent in 2008 while for the first time a contraction of 0.2 percent was forecast for 2009.

That compares with growth of 3.0 percent in 2007 and would be the first time since 1991 that Britain has seen a contraction for a full year.

However, the range of forecasts was wide, between 0.6 percent and 1.3 percent growth for this year and between 1.9 percent contraction and 0.7 percent growth for 2009.

Recession is typically defined as two consecutive quarters of contracting gross domestic product (GDP) and economists forecast successive contracting quarters from now through to June 2009.

Britain's economy has been hit by a global economic slowdown which started more than a year ago with mortgage problems in the United States and which has since spread.

Earlier this week, the government unveiled a 37 billion pound ($63.68 billion) plan to bail out three major banks, effectively part-nationalizing them, an idea since imitated by other governments, including Germany and the United States.

RATES DOWN

The BoE joined other major central banks last week in unprecedented coordinated monetary easing to shore up the economy in the face of the global financial crisis. It is expected to cut rates further from their current 4.5 percent.

Median forecasts from over 60 economists show the Bank Rate at 4.0 percent by the end of the year, 3.5 percent by the end of the first quarter, 3.25 percent by June and then a final cut to 3.0 percent in the third quarter.

Rates are seen beginning to rise again in 2010.

Medians in a poll conducted last week after the coordinated cut saw rates at 4.0 percent by year-end, 3.5 percent by end-March and 3.25 by June. A further cut to 3.0 percent was seen in the fourth quarter.

The BoE faces the dilemma of a slowing economy and rising consumer price inflation, which, at a 16-year high of 5.2 percent in September, was much higher than the bank's two percent target.

The poll showed economists predict inflation will be at 3.8 percent this year and then slow to 2.7 percent in 2009, the same as in last month's poll.

The economists saw a sharp slowdown in inflation starting in the second quarter of next year, giving the central bank more room to maneuver.

The price of oil has plummeted in recent weeks from highs of almost $150 a barrel to under $75 while food inflation, a key price pressure, has also eased.

Prime Minister Gordon Brown predicted on Wednesday inflation would fall over the next few months on the back of the fall in oil and food prices.

Meanwhile, the decline in British house prices, a bedrock of consumer wealth, accelerated in September while sales fell to the lowest level in at least 30 years the Royal Institution of Chartered Surveyors said on Tuesday. Figures released on Wednesday showed unemployment shot up at its fastest pace since the early 1990's recession, with the jobless rate at 5.7 percent, and economists in the poll saw it getting far worse -- reaching as high as 6.6 percent in 2009.