UK economy to slow this year despite rate cuts

LONDON - British economic growth is expected to slow even more this year, despite further Bank of England rate cuts, but the chances of a recession remain relatively low, a Reuters poll showed.

By (Reuters)

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Published: Wed 23 Apr 2008, 8:27 PM

Last updated: Sun 5 Apr 2015, 11:43 AM

The quarterly poll of 60 economists, taken April 15-23, showed economic growth at 1.7 percent in 2008, compared with 1.8 forecast in a March poll, and then picking up a tick to 1.8 percent in 2009, down from March's 1.9 percent forecast.

This is a sharp slowdown from the 3.0 percent growth seen in 2007, but the probability of a British recession remains low, with the median forecast giving this only a 30 percent chance within the next 12 months, up five percentage points from March's poll.

Most economists define recession as two consecutive quarters of contracting gross domestic product (GDP).

"We expect the UK to avoid recession, but to see an extended period of below-trend growth ... We believe the risks to these forecasts are slanted to the downside," said Howard Archer at Global Insight. In a separate poll, 42 of 58 economists said the United States was already in recession despite the Federal Reserve slashing 300 points from interest rates since September in an effort to prop up the world's largest economy. [ECILT/US]

Economies around the world have been undermined by a credit crisis that started with mortgage problems in the United States and has since spread across other markets.

The Bank of England said on Monday it planned to swap banks' risky mortgage assets for 50 billion pounds or more of government bills in the latest bid to spare Britain from the ravages of the global credit crunch.

JP Morgan said in research last week that total job losses in London's financial district may hit 40,000 as the credit crisis drags on, doubling their previous estimates.

Falling interest

The Bank of England cut rates by 25 basis points to 5.0 percent in April after earlier cuts in February and December and is expected to take a more gradual easing path than the Fed.

But minutes from the bank's April meeting, released earlier on Wednesday, showed the first three-way split amongst policymakers in almost two years with six voting for a quarter-point cut, one voting for a half-point cut and two wanting to hold rates steady.

The poll's median forecasts predict the Bank Rate will fall to 4.75 percent by June and then drop again to 4.5 percent by September where it will stay until mid-2009, the same as an April 10 poll.

However, the medians now predict a further cut in rates to 4.25 percent in the third quarter of 2009, suggesting economists think the slowdown will last longer than previously expected. Policymakers are mandated to target consumer price inflation at 2.0 percent and are weighing the risks of a slowing economy against rising price pressures.

"A rise in CPI inflation and sterling weakness could compound inflation pressures and will limit the BoE's room for manoeuvre to lower rates below 5.0 percent," said Kenneth Broux at Lloyds TSB.

BoE Chief Economist Charles Bean said last week inflation was likely to rise above three percent this year as the weaker pound exacerbates the impact of rising commodity prices and that the market turmoil was proving longer-lasting than previously expected.

Consumer price inflation held steady at 2.5 percent in March, weaker than expected and driving sterling to a record low against the euro as investors raised their bets on the chances of further UK rate cuts.



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