Gloomy prediction from business group

Bloomberg

Gross domestic product will contract 3.3 percent, instead of the 1.7 percent predicted in November, the biggest U.K. business lobby said yesterday. By the end of 2009, the economy will have contracted for six consecutive quarters, it said.

"The world has changed dramatically," Richard Lambert, the CBI’s director general, told reporters in London. "Faced with a global confidence crisis, a rapid fall in demand and credit constraints, U.K. firms have been forced to scale back investments and cut jobs."

Prime Minister Gordon Brown has pledged billions of pounds to revive lending as a housing slump deepens and job losses mount. The CBI expects the economy to shrink 4.5 percent from the start of the recession in the third quarter of last year, only slightly less than in the early 1980s slump during Margaret Thatcher’s first term. Output will stagnate in 2010, it said.

Government net borrowing will balloon to 148.7 billion pounds ($211 billion) in the next financial year, or 10.6 percent of GDP, and then rise to 11.8 percent of GDP the following year, the CBI said in the forecasts. Chancellor of the Exchequer Alistair Darling said in November that borrowing would be 8 percent of GDP in the year ending March 2010. Unemployment will rise to more than 3 million by the second quarter of 2010, up from 1.97 million at the end of last year, according to the CBI. The inflation rate will drop to 0.1 percent in the third quarter of this year, the CBI said.

The recession will damage Britain’s long-term growth prospects, Oxford Economics said in a report yesterday. GDP will grow 2.1 percent a year on average between the second half of 2006 and the final two quarters of 2018, compared with an average 2.9 percent expansion in the previous economic cycle, the report showed.