Downturn worse than 1930s

An old-fashioned shop going out of business

A leading think-tank is forecasting that the British economy will shrink by 4.3% this year and grow by just 0.9% in 2010, pouring cold water on the government’s own estimates.

In his Budget in April, chancellor Alistair Darling forecast a 3.5% contraction in the economy during 2009, with a recovery in the second half. He also predicted 1.25% growth in 2010 and 3.5% growth from 2011.

However, the National Institute of Economic and Social Research (NIESR) believes this is an underestimation and is warning that UK is facing the worst recession since the early 1930s. In a new report, the NIESR states: “"There is a real possibility that [the economy] will fall more this year than in 1931."

This is not the first economic forecast that casts doubts on the government’s figures. The IMF, the world’s leading economic watchdog, is expecting a 4.1% contraction this year, with the downturn likely to continue into 2010 when the economy will fall by 0.4%.

The NIESR expects the economy to experience growth of 2.3% in 2011. However, it adds that the surge in unemployment will continue hitting a peak of 3.1 million people – 9.6% of the total labour force – in 2011.

As a result of the economic contraction, the think-tank believes that public finances will be worse than Darling expects. Britain’s public debt could rise to 94.5% over the next years, significantly more than Darling's 76.2% forecast.

Despite comparing the current situation to that of the 1930s, the NIESR admits this could change going forward: “The pace of decline to date shows a remarkable resemblance to that of the depression of the early 1930s, though that similarity should be broken as a feeble recovery gets underway in the final quarter of this year.”

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