UK downturn is set to last for two years.

THE TIMES   6.8.08  (Online - evening)

Gary Duncan, Economics Editor

The Chancellor's hopes for a rapid revival in Britain's faltering 
economy by next year were undercut today after the International 
Monetary Fund (IMF) reduced its forecasts and warned that the UK 
faces a two year-long economic downturn.

In its annual economic health check on Britain, the IMF said that a 
series of heavy blows from tumbling house prices, the credit crunch 
and rising unemployment meant that UK growth would be a meagre 1.4 
per cent.
The IMF had previously forecast 1.8 per cent growth and today's 
revision is below the bottom end of Alistair Darling's present 1.75 
to 2.25-per-cent prediction.

In a further blow, the IMF said the economy was set to be even weaker 
next year, with growth over 2009 now forecast to be only 1.1 per 
cent, which is sharply down from the 1.7 per cent it predicted in in 
last assessment in the spring, and far below the Chancellor's 
forecast for growth of between 2.25 and 2.75 per cent.

If the IMF is correct, the rough two years for the economy this year 
and next would leave Britain with its worst performance since the end 
of the last recession in the early Nineties.

However, the fund said that, for now, it expected that Britain would 
skirt technical recession, defined as two quarters in a row of 
falling output (GDP).
The IMF has no single quarter of decline shown in its projections for 
the period over the next few quarters when the downturn is at its worst.

The IMF said that it expected a gradual revival in growth to begin to 
take hold from the second quarter of next year, with the downturn 
reaching its low point around the turn of this year.

As the Bank of England prepares to set interest rates tomorrow, amid 
widespread City expectations that it will keep the cost of borrowing 
on hold at 5 per cent, the IMF said that the present sharp rise in 
inflation meant that it had "no scope" to cut interest rates.

But amid fears that the Bank's rate-setting Monetary Policy Committee 
(MPC) could push rates higher this week or in coming months, today's 
report added: "Nor is there a clear case for an immediate increase in 
the Bank rate".

The IMF expects that headline consumer price inflation will climb 
close to 5 per cent during the next few months, and remain above the 
Bank's 2 per cent target.

However, it expects inflation to be back on target during 2010 — 
consistent with the MPC's goal to hit the target over a two-year time 
horizon.

After a recent report that the Treasury is working on plans to ease 
its strict rules for the Government's finances that could pave the 
way for increased borrowing and spending to help take some of the 
sting from the economic downturn, the IMF fired a warning shot at the 
Chancellor, cautioning him against any relaxation of plans to cut 
Britain's state borrowing over coming years.

It said that reforming the rules to allow a loosening of fiscal 
policy through increased borrowing in the short term would be 
misguided at a time when the Government is expected to be in the red 
to the tune of 3.5 per cent of GDP this year and next, and is set to 
breach the 40 per cent of GDP ceiling on the national debt set by 
Gordon Brown from 2009 onwards, according to the fund's forecasts.

The IMF recommended that the Treasury keep the 40-per-cent debt 
ceiling in place and that it draw up plans to reduce debt to this 
level over coming years, and by early in the next decade.

With slumping house prices a drag on growth, the IMF said that its 
main scenario for the UK was based on a fall in home values of "about 
15 per cent" over two years, "rather than a precipitous correction". 
However, it noted that "some market indicators" suggested a more 
severe plunge in prices of 20 to 25 per cent by 2011.
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TELEGRAPH   6.8.08 - 4:03pm
Food price spike adds to Bank of England's dilemma on interest rates
By Angela Monaghan

The dilemma facing the Bank of England's Monetary Policy Committee as 
it sits down for its monthly meeting on interest rates was brought 
into sharp relief today by fresh data showing that the cost of food 
is still spiralling while the economy is slowing faster than official 
estimates suggest.

Consumers were hit with a 9.5pc jump in food prices in the year to 
July, as retailers stepped up their bid to pass on their own rising 
costs to customers.

However, the rate of price inflation actually slowed for non-food 
items, up 0.1pc in July compared with 0.2pc in June.

Overall shop price inflation was 3.2pc in July, according to the BRC-
Nielsen Shop Price Index (SPI).

It highlights the inflationary pressures facing Britain, but a raft 
of gloomy surveys have also shown that the risk of Britain sliding 
into recession is becoming more likely, which makes the MPC's dilemma 
on whether to cut, raise, or hold interest rates, tougher. The Bank 
will give its decision tomorrow at noon and the majority of 
economists expect rates to be held at 5pc.

In a separate report, the National Institute of Economic and Social 
Research (NIESR) said that the British economy grew by just 0.1pc in 
the three months to July.

The official estimate for second-quarter GDP growth to the end of 
June is 0.2pc.

But economists now believe that weak data from the manufacturing and 
services sectors over the last week will require the Office for 
National Statistics to revise down that figure.

NIESR said today that the growth rate is likely to fall further in 
the three months to August, unless "there is a clear indication of an 
increase in public sector output."

As some of the UK's biggest sectors - including services, 
construction, and manufacturing - contract, and companies struggle to 
contain rising costs, employment levels are falling.

The number of people in permanent jobs fell last month at its fastest 
rate since the 9/11 attacks in 2001, a report by the Recruitment and 
Employment Confederation and KPMG showed. The number of people placed 
in temporary jobs, and the number of temporary vacancies both fell, 
while wage inflation slowed.

The combined impact of a declining economy and the rising cost of 
living is dampening consumer confidence, which plunged to a record 
low in July according to a survey by Nationwide, also out today.