UK Faces Sharpest Downturn in 20 Years

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 3 million by 2010, the Confederation of British Industry said on Monday.

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It said it expects the British economy to contract by 1.7 percent in 2009 and blamed the fallout from global financial turmoil for the massive revision to the 0.3 percent 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 2 million by the end of this year and rise to 2.88 million, or 9 percent 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. Official figures released last week showed British unemployment rose to its highest since 1997 in the three months to September, with 1.825 million people out of work.

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 percent in 2009.

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"This latest forecast shows that 2009 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 percent by the end of next year from 4.2 percent last quarter.

According to its forecasts, inflation could drop as low as 1.1 percent in 2010, well below the Bank of England's 2 percent target. That will give the central bank room to reduce interest rates further, possibly to as low as 1.5 percent, the CBI said.

The Bank of England this month slashed interest rates by an unexpected 1.5 percentage points, taking them to 3 percent.

The CBI predicted fixed investment would fall by 3.8 percent in 2008 and by 10.5 percent in 2009 as firms would be hit hard by slowing demand and difficulties in obtaining credit.

© 2008 CNBC.com