Â¥ The economy will shrink by 4.3 per cent this year, and then experience a weak recovery, with GDP rising by 0.9 per cent in 2010. Â¥ The unemployment rate will peak at 9.6 per cent in 2011. Â¥ Consumer spending will fall by 3.7 per cent this year and a further 1.1 per cent in 2010. Â¥ The recovery will be driven by net trade, which will contribute 1.2 per cent to GDP growth in both 2010 and 2011. Â¥ The medium-term outlook for government finances is grim, with public sector net borrowing forecast at 8.6 per cent of GDP in 2013Ã14. The recession is on track to become the most serious since the 1930s as GDP declines by 4.3 per cent in 2009. There is a real possibility that GDP will fall more this year than in 1931. 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 under way in the final quarter of this year. The economy will expand by 0.9 per cent in 2010, picking up to 2.3 per cent in 2011. Unemployment will carry on rising to a peak of 3.1m people à 9.6 per cent of the labour force in 2011. This year's severe contraction is being driven by falling consumer spending and investment. Private consumption will drop by 3.7 per cent this year mainly because of a sharp rise in the saving ratio, from 1.9 per cent of disposable income in 2008 to 6.5 per cent in 2009. Business investment will fall by 10.3 per cent, private housing investment by 23.3 per cent and a vicious rundown in inventories will contribute 1 percentage point to the overall 4.3 per cent fall in GDP. The recovery in 2010 and 2011 will depend heavily on net trade, supported by a lower pound, as increases in exports outpace those of imports. Growth will be weak in 2010 as consumer spending falls further, by 1.1 per cent, and business investment also declines again, by 8.1 per cent. In 2011, the recovery picks up momentum as consumer spending rises by 1.3 per cent. The outlook for the public finances during the recovery is even worse than the Chancellor set out in the Budget because nominal GDP will rise less than he expects as both real growth and inflation turn out to be lower. Since money GDP is in effect the tax base, revenues will be smaller than the Treasury is projecting. Public sector net borrowing will thus fall only gradually to 8.6 per cent of GDP in 2013Ã14 compared with the Treasury's forecast of 5.5 per cent. Further spending cuts and tax increases will be required to put the public finances on a sustainable footing. The policy of quantitative easing could be made more effective if the Bank of England revived the market for private bills of exchange, a short-term form of commercial finance, by saying that it was prepared to purchase them. This would directly help businesses unable to get credit at present as well as increasing the monetary base.
