OECD says UK economy to shrink 1.1 percent in 2009

LONDON (Reuters) - Britain's economy will shrink 1.1 percent next year and unemployment is likely to rise to 6.8 percent of the workforce, the Organization for Economic Cooperation and Development forecast Tuesday.

The Paris-based think-tank said British GDP -- which contracted 0.5 percent between June and September -- would probably start to expand again only late next year. Some 5.8 percent of the workforce currently cannot find a job.

"Given the dramatically weaker growth outlook and signs that inflation expectations are now declining, the Bank of England should continue to cut its policy rate rapidly, particularly because fiscal policy is constrained by the weak budgetary position," the OECD said.

The OECD prepared its report before finance minister Alistair Darling announced over 20 billion pounds ($30 billion) in fiscal stimulus in his pre-budget report Monday, pushing British government borrowing to a record level.

Darling also gave a similar economic outlook to the OECD's for 2009, forecasting the economy would shrink 0.75-1.25 percent. But he was more optimistic about the strength of recovery in 2010, seeing growth of 1.5-2.0 percent compared with the OECD's 0.9 percent forecast.

The OECD said it expected house prices -- a big factor for consumer sentiment in Britain -- to continue falling until they were 20 percent below the peak levels reached in late 2007, bottoming out in the second half of 2009.

House prices have already fallen more than 15 percent from their peak, according to data from mortgage lender Halifax.

(Reporting by David Milliken, editing by Kate Kelland/David Stamp)