UK 2010 growth forecast bullish

The British Government's forecast for a strong rebound in economic growth next year is optimistic and preparations must be made for the "worst case scenario", a group of lawmakers said yesterday.

Parliament's Treasury Committee, which scrutinises the ruling Labour party's economic policies, said more action was needed to quickly increase the amount of lending in the economy.

"There is still far more work to be done. Without that increase in availability the recovery of the economy will be placed in jeopardy," said John McFall, chairman of the committee, in a study of November's pre-budget report.

"Interest rates have fallen considerably. Soon they may be unable to fall further. We need to make sure we are prepared for the worst case scenario and make it clear to the public and businesses that the authorities will take firm action."

November's pre-budget report included a £20 billion (Dh102bn) stimulus package aimed at reducing the severity of the downturn and Britain has given extensive support – including bailouts and nationalisation – to its hamstrung banks.

But concerns are growing about how effective all those measures – including a small reduction in sales tax – will be on the wider economy in the near term, raising speculation that a further fiscal stimulus may be required.

Britain's economy entered its first recession since the early 1990s at the end of last year and is expected to remain in the doldrums for the rest of this year, if not longer.

Gross domestic product contracted by 1.5 per cent in the three months to December – the sharpest fall since 1980. That bigger than expected drop left the government's current forecast for a fall in GDP of about one per cent this year – and growth of about 1.75 per cent in 2010 – looking optimistic.

"The committee considers that the balance of risks to the Treasury's forecast... for a swift recovery in economic growth for 2010 after a significant decline in output in 2009, is on the downside," the committee said.

"The overall effect of the fiscal stimulus remains uncertain. The cost of the reduction in value added [sales] tax is considerable and, in the view of the majority of commentators, the Treasury's analysis of its impact is an optimistic one."

The Bank of England has slashed rates to 1.5 per cent from five per cent since October and borrowing costs are expected to near zero soon, opening the door to unconventional monetary policy measures to boost the economy.

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