UK GDP shrank by 2.1 per cent during the second half of 2008 and is expected to shrink by a further 2.7 per cent next year, the sharpest decline in 60 years.

Consumer spending will be the biggest tug on the economy next year, according to the NIESR with a fall of 3.8 per cent predicted next year.

However, this is despite the fact that real disposable income is expected to rise from 1.5 per cent in 2008 to 3.3 per cent in 2009, as inflation is expected to fall.

And, as the Government tries to dig the UK out of the recession, the NIESR is predicting that public finances will continue to deteriorate as public sector net borrowing will jump to 8.7 per cent of GDP in 2009-10.

According to the NIESR, during 2008, a collapse in housing investment and lower stockbuilding were some of the main downward forces on the economy.

Falling interest rates have been an attempt to combat this and boost the mortgage market, having fallen from 5.5 per cent to just 1.5 per cent in twelve months. However, according to researchers at the NIESR, interest rate cuts may not be as effective as they once were:

“With the banking sector reining in its lending, and widening the spread of bank lending rates over borrowing rates, the monetary transmission mechanism appears to have become weaker.

“With rates offered on deposit accounts now below one per cent, according to Bank of England data, there is limited scope for banks to be able to pass on further Bank Rate cuts to borrowers without squeezing their margins.”

The latest interest rate decision is expected tomorrow, analysts are expecting a cut of 0.5 per cent, whole the Building Societies Association has called for no cut.

Regardless of the interest rate decision, the NIESR is in support of quantitative easing in the form of buying Government bonds or private sector assets.

The UK is expected to turn to quantitative easing following a scheme which allows the Bank of England to use a special £50billion fund to by shares in viable companies.

© Fair Investment Company Ltd