UK faces sharp downturn and big rise in jobless

Britain will suffer its sharpest economic contraction in almost two decades next year and the number of people out of work could rise to nearly three million by 2010, the Confederation of British Industry said yesterday.

It said it expects the economy to contract by 1.7 per cent next year and blamed the fallout from global financial turmoil for the massive revision to the 0.3 per cent growth forecast it had issued in September.

The global economy is suffering its worst financial crisis in 80 years, with governments around the world injecting trillions of dollars into the banking system to keep it afloat.

"What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting," said John Cridland, CBI deputy director-general.

"The banking system has come under immense strain, sending consumer and business confidence plummeting in its wake."

The CBI said it expected unemployment to reach two million by the end of this year and rise to 2.88 million, or nine per cent of the workforce, in 2010 - the year by which the ruling Labour Party must call a general election.

That would be the highest jobless total since the last quarter of 1993. The CBI said a deteriorating labour market and weak consumer confidence would weigh on household spending. It predicted household consumption would contract by 1.8 per cent next year.

"This latest forecast shows that next year is going to be a very tough year for business, with the sharpest fall in GDP since 1991," said Ian McCafferty, the CBI's chief economic adviser.

Reduced spending and falling commodity prices will ease price pressures, the CBI said, predicting the inflation rate would fall to 1.7 per cent by the end of next year from 4.2 per cent last quarter.

According to its forecasts, inflation could drop as low as 1.1 per cent in 2010, well below the Bank of England's two per cent target. That will give the central bank room to reduce interest rates further, possibly to as low as 1.5 per cent, the CBI said.

The bank this month slashed interest rates by an unexpected 1.5 percentage points, taking them to three per cent.