UK economy to shrink over 2% in 2009

2009 should see the UK economy shrink by as much as 2.7 per cent in 2009.

Economists now see contraction in GDP lasting throughout the coming year and into 2010 – despite the predictions from Alistair Darling that the UK economy would start to grow in the second half of 2009.

Capital Economics now predicts a 2.5 per cent fall in GDP in 2009 and a further one per cent cut in 2010.

"We now think that GDP will fall by 2.5 per cent this year and a further one per cent in 2010, on top of the contraction in the second half of 2008," the analysts predict.

"A total peak to trough fall in output of four per cent would make this recession worse than those in the early 1990s and mid 1970s, but not quite as bad as that seen in the 1980s."

Tom Elliott, global strategist at JPMorgan Asset Management, predicts a 2.2 per cent fall in GDP over 2009.

However, he does see government investment and interest cuts bringing a return.

"Our investment bank is forecasting UK GDP to fall by 2.2 per cent in 2009, with most of the weakness occurring in the first half of the year," he said.

"This is not so different from consensus within the City, which sees a recovery taking place in 2010, fuelled by large increases in public spending and continuing loose monetary policy."

As such he predicted a possible sustainable stock market rally taking place as early as the third quarter 2009.

Analysts at Global Insight predict a 2.7 per cent contraction of the economy over 2009.

"We expect the UK economy to contract through 2009, with the decline in GDP being particularly sharp in the first half of the year," said Howard Archer, chief UK economist at Global Insight.

"By the end of 2009, GDP is forecast to be 3.7 per cent below the peak level seen in the first half of 2008. GDP is forecast to expand by just 0.2 per cent in 2010 as recovery develops only very gradually through the year."

He added with the global economy facing its biggest decline since World War II, a contraction of over three per cent over 2009 and further shrinkage in 2010 is possible.

With the UK economy very much on the rocks, further pressure is falling on the Bank of England to cut interest rates further this week.

Dr Archer predicts a "hefty interest rate cut" this month, with rates falling to 1.25 per cent.

Capital Economics meanwhile sees rates falling lower still over the year to "very close to zero", with a one per cent cut later this week.