'W shape' recovery from recession predicted

Tuesday 17th November 2009

Financial experts have warned the UK economy could weaken once again early next year, with a 'W' shape recovery predicted from the current recession.

The fourth quarter of 2009 is expected to represent a deceptively strong bounce following the disappointing GDP figures of the previous quarter which showed Britain is still in the worst recession since the second world war.

However, the Centre for Economics and Business Research (CEBR) has said the prospects for the new year are "not so bright".

"Business to business look OK, exports may be picking up a little, but disposable incomes are likely to be squeezed again, especially if the VAT cut - which we think has been notably helpful in sustaining consumer spending in the UK at a time when it has fallen much more sharply in the US - is reversed as planned on January 1st 2010," CEBR's chief executive Douglas McWilliams said.

"With business investment still on the backburner; government spending stymied by the run up to the election (which will put some major projects on hold) and no further boost from the end of destocking, it is quite likely that economic growth will stutter in early 2010.

"A W shape is well within the margins of forecasting error - not great for the unlucky prime minister [Gordon] Brown in the run up to an election."

The Cebr has called for next month's pre-Budget report to be act as the "firing of the starting gun" to an intense battle between the political parties over economic policy for the next six months.

The research group said chancellor Alistair Darling would have to be careful in contemplating more expansionary government action while being weary of the threat from ratings agencies of a downgrading of UK debt.

"A more credible plan to cut public spending in the medium term than simply relying on wildly optimistic forecasts - as seen in the last Budget - is absolutely necessary," Mr Williams added.

"The problem for the chancellor is that this would retrospectively justify everything that [shadow chancellor] George Osborne has said about public spending. A reversal of the 50 per cent tax rate - a rise in tax that is actually likely to lose money - would be helpful but politically impossible.

"But a six-month extension of the 15 per cent VAT rate would be clever - it will not cost much if it helps sustain consumer spending and will in any case have no significant fiscal cost beyond 2010. And it would move some of the stuttering in the economy to after the election."

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