Britain faces 1-2 year recession despite rate cuts

LONDON (Reuters) - Britain's recession is likely to last more than a year as growth falls off a cliff despite the Bank of England continuing to hack away at interest rates as inflation comes down, according to a Reuters poll.

The monthly poll, conducted Nov 14-20, found 16 out of 27 economists predicting it would last more than a year, seven said it would last between six months and a year and only three said it would last less than six months.

"We now expect a more prolonged recession lasting through most of 2009, followed by a gradual recovery in 2010 as a result of lower inflation, lower interest rates, some fiscal stimulus and a gradual global recovery," said John Hawksworth, head of macroeconomics at PricewaterhouseCoopers.

The British economy is expected to have expanded just 0.8 percent this year and is seen contracting 1.3 percent in 2009, well below the 1.0 percent growth and 0.2 percent contraction forecast respectively last month, the poll found.

This represents the 10th consecutive month the median 2009 forecast has been downgraded. This is way down from the healthy 3.0 percent growth seen in 2007 but forecasts were relatively wide, ranging between 0.4 and 1.0 percent growth for this year and between 0.2 to 2.5 percent contraction for 2009.

Data released last month showed the British economy shrank 0.5 percent in the third quarter, the first decline in 16 years, after stagnating in the second quarter. Recent data suggests the UK is now in recession, usually defined as two consecutive quarters of contraction.

Economists predicted Britain would see five quarters of contraction in a row, with growth not predicted until the last quarter of 2009.

The country has been hammered by a raft of negative news with unemployment at its highest level in more than a decade, its dominant services sector shrinking at a record pace, while house prices, a bedrock of consumer wealth, have plummeted.

Meanwhile, the pound has recently fallen to its lowest level against a trade weighted basket since 1996.

The British government is due to publish its pre-budget report next week and that is expected to include broad measures to help businesses and families cope with the economic downturn and the size of the fiscal boost may reduce the need for further interest rate cuts.

MORE RATE CUTS COMING

The Bank of England surprised everyone earlier this month when it slashed a whopping 150 basis points from interest rates, bringing them to a low not seen in over 50 years at 3.0 percent, and the poll showed they have not finished their hatchet job.

Minutes from the November meeting, released on Wednesday, showed the Monetary Policy Committee voted unanimously for the chop but had considered cutting further, indicating more cuts would come.

Median forecasts of 75 economists show Bank Rate at 2.5 percent at the end of this year, falling to 1.75 percent by March and then dropping again to 1.5 percent by the middle of the year where it would remain through to early 2010.

This compares to a poll last week which saw rates ending this year at 2.5 percent, then dropping to 2.0 percent by March and 1.5 percent by June.

Data released on Tuesday showed inflation staged its biggest drop since records began to 4.5 percent in October, a huge fall from September's 5.2 percent, but still considerably above the bank's two percent target.

However, the bank said last week inflation could drop to below 1 percent in two years, leaving plenty of room for further rate cuts as it saw the British economy shrinking sharply.

The poll showed economists predict inflation will be 3.8 percent this year and then sink to 2.2 percent in 2009, compared to 3.8 and 2.7 percent respectively in last month's poll.

"With the economy in recession, we believe the peak in inflation is now firmly behind us," said Matthew Sharratt at Bank of America.

The economists saw inflation slowing rapidly over the course of next year, plummeting to just 1.1 percent in the first quarter of 2010, giving the central bank ample room to cut rates further.

The price of oil has been dropping from highs of almost $150 a barrel which coupled with falling commodity and energy prices has helped drag inflation expectations down.