UK GDP to Post Biggest Fall Since the War: Ernst & Young

UK gross domestic product (GDP) is likely to shrink by 4.5 percent this year, the largest decline since 1945, and recent hopes of recovery are running well ahead of reality, Ernst & Young warned in a forecast released Monday.

A "subdued recovery" of half a percentage point is likely to follow for the UK economy next year, but a sustainable improvement will only be attained when world trade starts to pick up, the Ernst & Young ITEM Club summer forecast showed.

"The economic patient has been in a trauma, but thanks to the paramedics at the Treasury and the Bank of England who pumped billions of pounds worth of medicine into the economy, the patient has been stabilized for now," Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, wrote.

But if "the worse case scenarios of the threat of swine flu are fully realized, GDP could fall by as much as an additional 3 percent this year and another 1.7 percent in 2010," Spencer wrote.

Overall the short-term outlook for the UK economy is still a gloomy one, because credit remains constrained and the current lack of competition among banks means lending will continue to remain expensive and restricted.

Interest rates will be kept at 0.5 percent well into next year and consumer spending is likely to weaken further over the second half of this year, according to the forecast.