UK GDP to fall 1%

The UK economy is likely to contract by one per cent in the three months to the end of November.

The forecast from the National Institute of Economic and Social Research (NIESR) points to the contraction in GDP accelerating.

The body now expects the final quarter of 2008 to see GDP falling by over one per cent – firmly putting the UK in recession.

Martin Weale, director of NIESR, said: "We have predicted a decline of 1.6 per cent in 2009, but in light of recent bad data it could be bigger.

"A contraction of two per cent would not be amazing."

He added he would not be surprised if the contraction continued until 2010.

NIESR claims the main problem facing the UK economy is the drying up of lending.

"The government faces the real risk that output will fall more sharply than it expected to the end of next year," the report states.

"The main problem that it needs to address very urgently is the availability of bank credit; further interest reductions are unlikely to have much effect."

Mr Weale suggested the government may be forced to offer more cash to the banks to increase lending and further guarantees.

He also says growth could eventually come from exports as sterling devalues – but it may take time for exports to pick up.

Across the sectors, only agriculture and public services are forecast to show growth over the last three months.

Industry is expected to contract by 8.9 per cent over the year, construction down 1.5 per cent and private services down 4.7 per cent.