Britain will be one of the industrialised countries worst hit by the severest recession in the global economy since the early 1980s.
That is the verdict of the Organisation for Economic Co-operation and Development (OECD) in its twice-yearly Economic Outlook published last week.
“The UK economy stopped growing in the second quarter of 2008 and GDP contracted by 0.5% in the third quarter,” writes Klaus Schmidt-Hebbel, the OECD’s chief economist (pictured) in the report.
House prices are about 15% below their peak of a year ago and mortgage approvals are at a record low, suggesting that residential investment will contract further, the report says.
The labour market has also begun to weaken, with the claimant count 14% higher than a year earlier, signalling big increases in the unemployment rate over coming quarters. Consumer price inflation accelerated over the past year to 5.2% in September.
“Economic conditions have deteriorated markedly and forward-looking indicators suggest a further sharp weakening in activity over the next quarters,” according to the report. “These factors, combined with turmoil in the banking and financial sectors, are already cutting domestic demand.”
Growth may resume only in late 2009 and while unemployment is set to rise rapidly, it is not expected to stabilise until 2010, the report says. Inflation should recede, reflecting the recent falls in energy and food prices and increasing the output gap.
Schmidt-Hebbel also takes a glum view of employment prospects for the OECD as a whole: “The number of unemployed in the OECD area could rise by 8 million over the next two years. At the same time, inflation will abate in all OECD countries and some even face a risk, albeit small, of deflation”.
American economic output is forecast to decline until the first half of 2009. Other OECD countries in which the economic downturn looks likely to be severe include Hungary, Iceland, Ireland, Luxembourg, Spain and Turkey. These economies are most directly affected by the financial crisis, which in some cases has exposed other vulnerabilities, or by severe housing downturns.
Many of the main non-OECD countries are also slowing because of the combined effect of more difficult international credit conditions, early policy tightening, income losses owing to lower commodity prices and weaker demand from developed countries.