Recession 'is even worse than feared': Chancellor predicts steepest slump ever

[Watchman]

Recession 'is even worse than feared': Chancellor predicts steepest slump ever

By Sam Fleming
Last updated at 10:33 PM on 26th November 2009
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Admission: Alistair Darling is expected to confirm the recession is even deeper than feared next month

The recession is proving even deeper than feared, Alistair Darling will admit in next month's Pre-Budget report.

The Chancellor will forecast the steepest annual slump since modern records began.

But he is likely to put a brave face on the outlook by declaring that Britain has finally returned to growth in the fourth quarter of the year.

Last night Treasury sources indicated that Mr Darling will sharply downgrade his economic predictions in the December 9 statement, forecasting a slump of 4.75 per cent for 2009.

That would rival the worst year of the Great Depression of the 1930s, highlighting the terrible toll the banking crisis has taken.

In the Budget the Chancellor forecast a 3.5 per cent contraction for this year.

The difference will wreak havoc with the public finances, which already show a Government hugely in debt and borrowing at record levels.

The return to growth should allow the economy to record further modest growth of about 1.25 per cent in 2010, broadly in line with the Treasury's March forecasts.

But it is still well behind rivals such as Germany, France and Japan, which have already emerged from recession.

Yesterday Mr Darling gave a strong hint about the economic outlook, pointing out that independent analysts are predicting a 4.7 per cent fall in British gross domestic product this year.

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'At the time of the Budget, my forecast for growth in 2009 was in line with the average of external forecasters,' he said.

'Since then, new data has shown that most economies, ours included, suffered a severe shock in the first quarter of this year.

'To account for this, the majority of external forecasters are revising their predictions for this year and next.

'Today the average of external forecasts for 2009 is much lower than in April. However, as I said at the time of the Budget, I still expect growth to return around the turn of the year.'

Part of the reason for Britain's longer, deeper recession is the economy's heavy reliance on financial services and property investment. The Office for National Statistics said that the Government borrowed £11.4billion in October - the most ever for that month - thanks to record declines in tax revenues.

The deficit was 88 times the shortfall for the same period last year. The Chancellor predicted he would rack up a £175billion deficit this year, with only a modest improvement the following year.

However, a return to growth would allow him to keep any downgrades to this forecast relatively modest.

But with independent forecasts suggesting a final deficit closer to £200billion for this year, he still faces an enormous task.

The Government is putting forward a bill to halve the deficit within four years, but it remains under intense pressure from to do more, in particular from Bank of England governor Mervyn King.