British Economy to Shrink by 3.3% in 2009: CBI

Britain will fall into a deeper economic recession than previously thought, the Confederation of British Industry said on Monday, as tight credit conditions and a global downturn weigh down on companies.

Sharon Lorimer

And the weak pound will provide little impetus because the severity of the downturn in Britain's overseas markets will depress demand even as goods become cheaper to import.

The CBI reckons the UK economy will shrink by 3.3 percent this year, almost twice as bad as its last estimate in November for a contraction of 1.7 percent. It estimates the economy will not grow at all in 2010.

The lobby group says a lack of credit has made conditions worse for companies and it called on the government to speed up measures aimed at getting credit flowing again.

"How the forecast really pans out depends critically on how credit flows to the corporate sector can be resolved," said CBI chief economic adviser Ian McCafferty. "This is an essential pre-condition to a recovery."

The global financial crisis has caused wholesale money markets to freeze up, forcing banks to clamp down on lending to businesses and consumers.

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The government has pledged to help small and medium sized firms get funding by guaranteeing bank loans to firms.

And on Friday, the Bank of England launched a scheme to buy short-term corporate debt to help free up the credit market.

But the weak pound would not provide much support while conditions across the world are deteriorating, McCafferty said.

The pound has has lost around 20 percent against the euro and nearly 30 percent against the dollar over the last year as a rapid deterioration in activity has forced the Bank of England to slash interest rates. Policymakers are hoping the weaker currency will help slow the pace of economic decline.

"The fall in sterling will do little to provide any stimulus to GDP in 2009 because of the declines in overseas activity," McCafferty said. "But if we can get credit flowing across the economy, the considerable monetary and fiscal stimuli already in the pipeline should start to feed through
later in the year."