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PRE-BUDGET '08: Recession expected to run through 2009

Date: 24 November 2008   |   Author: Rupert Saunders

The Chancellor used the Pre-Budget report to confirm he expects the recession will run until at least the second half of next year - although he never actually used the dreaded 'R' word.

He predicted that economic activity in the UK will continue to contract in the first two quarters of 2009, as it has in the final two quarters of this year, and then start to recover.

Even so, the current prediction is the UK Gross Domestic Product (GDP) will fall by between 0.75% and 1.25% over 2009 as a whole. It is then targeted to grow by between 1.5% and 2.0% in 2010 before returning to a trend growth of around 2.75%.

In order to cope with the contraction, the Chancellor will inject a £20bn stimulus into the economy between now and April 2010. This will significantly increase the national debt to £118bn in 2009 (or 8% of GDP) and £105bn in 2010. After that it will start to fall again and the Chancellor hopes the economy will be back 'in balance' by 2015/16.

The slowing economy is predicted to have a dramatic effect on inflation, which is now forecast to slow to 0.5% by the end of 2009. This is well below the current Bank of England target of 2.0% and should allow further cuts in interest rates.