UK has slumped back into recession, claims City bank

The UK economy has slumped back into recession for the first time in more than a decade, a leading City bank claimed yesterday.

ING, the Dutch bank, said it believed Britain would experience two successive quarters of contraction – an economist's technical definition of a recession. That would come as a severe blow to the Treasury, which was yesterday forced to defend its optimistic economic forecasts in the face of criticism from MPs from all major parties.

Research from ING published last night said that official figures released next week would show the economy contracted by 0.3 per cent in the final three months of last year. The bankblamed soft retail sales, a rapid deterioration in the UK's net exports and ongoing weakness in capital expenditure.

"It looks like the UK's unbalanced economy may finally have fallen over," Mark Cliffe, the chief economist at ING Financial Markets, said.

"The strength of car sales, the housing market and public spending may not have been enough to prevent at least a modest fall in overall GDP in the fourth quarter."

Moreover, ING's latest economic forecast suggests the first quarter of the current year may provide a repeat performance, as mounting fears of war serve to depress private spending. It has pencilled in a 0.2 per cent dip thanks to a slump in business investment and stock building as firms take fright at the geopolitical outlook.

"With two back-to-back quarterly declines in GDP, the UK is set to meet the classic US definition of recession," Mr Cliffe said. The last time the UK suffered that fate was during the summer and autumn of 1991.

ING believes the UK economy will grow by just 1.5 per cent this year, also the slowest rate since 1991, which will force the Bank of England to cut rates by half a point to 3.5 per cent. This would be the lowest base rate in 49 years.

Meanwhile the Commons' Treasury Select Committee criticised the Chancellor, Gordon Brown, for being "optimistic" in his pre-Budget report (PBR) forecasts for strong growth in 2004 and 2005.

"While there are upside and downside risks to the outlook for the UK economy, we believe that the overall balance of risks to the Treasury's GDP forecasts is the downside," it said.

A Treasury spokesman said the PBR had laid out both upside and downside risks, adding: "Three-quarters of independent forecasters are within or above our forecast for the current year."