A WARNING that Britain's economy will shrink by 4.5 per cent this year – the biggest fall in a single year since 1945 – is set to spark fresh concern over the government's plummeting finances with figures due this week.
The forecast today from the influential Ernst & Young Item Club is considerably more pessimistic than the 3.5 per cent fall predicted by the government.
And it implies that the public finances are in an even more dire state than was believed. Th
e forecast will bring critical attention to bear on official figures due tomorrow on the budget deficit numbers for June and for the April-June quarter.
The Item Club forecast warns that hopes of economic recovery are "running ahead of reality". But it does predict a return to modest growth of 0.5 per cent next year.
Professor Peter Spencer, economic adviser to the Item Club, said: "Unfortunately, it is hard to see any very solid grounds for sustained optimism at the moment. It remains unclear how quick and complete recovery will be, and there is still a serious chance of relapse."
Indeed, some analysts believe that, despite hopes the worst of the downturn may be behind us, there could be a so-called "double dip" recession, where the economy stabilises before contracting again.
The only "ray of hope", said the Item Club, was a recovery in world trade, which UK exporters would be able to exploit due to the weak pound. The main reason for the gloomy outlook, the club said, was the fact that banks were still not lending enough to boost the economy.
"There is currently little sign of any extra lending to either companies or consumers. Banks are saying that they will expand lending more aggressively over the next three months, but it seems unlikely that they will be able to meet the demand for credit," argued Prof Spencer.
This could spark a fresh torrent of protest over Royal Bank of Scotland if, as some predict, the bank announces a dramatic rebound into profit for the six months to end June.
The Item Club's downbeat forecast will bring even greater scrutiny to bear on Britain's public finances.
Figures out tomorrow are expected to show the UK's deficit soared last month to £15.8 billion, more than double the figure a year ago. And for the April-June quarter, Citigroup economist Michael Saunders expects the deficit to have spiralled to a record high of £46.3bn from £21.5bn a year earlier.
Deeper-than-expected recession is tearing into tax revenues, while unemployment adds to government spending.
The Item Club also warns today of the threat to the economy from swine flu. If doomsday predictions do materialise, it forecasts a further 3 per cent contraction in GDP this year.
However, the prediction is not the consensus view. Last week, the IMF forecast that GDP would shrink by 3.75 per cent this year. And preliminary GDP figures for the second quarter, due on Friday, are likely to show the economy shrinking at a slower pace than preceding quarters.
SCOTS FIRMS 'HIT BY LACK OF COMPETITION IN BANKING'FINANCE secretary John Swinney has warned that a lack of competition in the banking sector means Scottish businesses are losing out.
In a letter to Chancellor Alistair Darling, Mr Swinney has backed concerns raised by The Scotsman that the merger of HBOS and Lloyds TSB, which was supported by the UK government, means that businesses are finding it harder to get loans, although the majority of firms can still get access to cash.
His letter follows a survey carried out by the Scottish Government between March and April 2009, which showed a significant increase in the number of businesses being turned down for loans.
Mr Swinney suggested this was because RBS and Lloyds, both now largely owned by the taxpayer, control 75 per cent of the market.
"The survey demonstrates our concern over lack of competition in the finance market following the merger of HBOS with Lloyds TSB," the finance secretary said.
"We need competition and greater choice in financial products for our businesses to be able to contribute to the growth and recovery of the economy.
"That is something the UK government must address and I have written to the Chancellor to demand he does exactly that."
The UK government has said that the merger of the banks was needed to prevent full nationalisation of HBOS. It claims that it is pushing banks to provide better loan facilities to companies.
