FOREX UPDATE

LONDON: The British economy is expected to record the biggest single year contraction since 1945, the Ernst Young ITEM Club said Monday. In its latest economic outlook, the think tank is forecasting the economy to shrink 4.4% in 2009, worse than the 3.5% decline predicted in April. The group sees recovery in 2010 with a 0.5% growth. According to the ITEM Club, hopes of recovery are running ahead of reality and sees no sustainable improvement until world trade begins to pick up. The main risks remain on the downside and include the threat posed by the H1N1 swine flue virus, which could reduce a further 3% from GDP this year and 1.7% in 2010. Companies should review their plans for this kind of contingency. New home-working and video-conferencing facilities offer a way to cope with this, while retail and industrial units should check their stock levels and supply chains. Peter Spencer, chief economic adviser to the Ernst Young ITEM Club said, "Economic patient has been in 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." But he said, "it remains unclear how quick and complete recovery will be and there is still a serious chance of a relapse." The short term outlook stays gloomy as credit remains constrained and the lack of competition in the banking sector indicates lending to consumers and corporates would continue to be expensive and restricted with no further stimulus available to work through the system. Further, the think tank forecasts no change in the 0.5% interest rate well into next year, with the significant degree of spare capacity that exists ensuring that policy would need to be tightened only very gradually after that. Company cut-backs in employment and earnings continued to put pressure on consumer recession. But, rise in unemployment was not bad as was originally feared. Still, the think tank expects unemployment around 8.8% of the labor force by next spring. Disposable incomes were under severe pressure and consumer spending would possibly weaken again over the second half of this year. Hampered by a weak housing market, consumer spending will shrink 3.2% in 2009 and a further 0.2% next year. Meanwhile, disposable income is set to rise only 1% in 2009 and again in 2010. The report said business investment would fall by 10.5% this year with an additional decline of 1% in 2010. At the same time, private housing investment would plunge 27% in 2009.