International credit ratings agency Standard & Poor's warned yesterday that the UK was "more exposed to a true recession than the Eurozone considered as a whole".
S&P's UK recession warning comes as respected London-based consultancy Capital Economics revises down its forecasts for the UK economy to predict a fall in gross domestic product of about 0.25% during 2009 as a whole. Capital noted that, if realised, this would be the first time output had fallen in a full year since 1991.
Capital had been forecasting 0.5% growth for next year previously, but it says in a new report today: "Recent news on the UK economy, coupled with the growing danger of a fall in bank lending, has left us even more concerned over the likely severity of the economic downturn."
S&P said yesterday: "A flurry of fresh economic data suggests that initial expectations of Europe remaining relatively immune from the US slowdown were overly optimistic."
Jean-Michel Six, S&P's chief economist for Europe, highlighted the "elevated level of household debt and the sharp downturn in housing" as the principal reasons why he considers the UK more exposed to recession than the eurozone.
However, he added: "We think this shock (in the UK) will be less dramatic than previous recessions in the early eighties and nineties."
The Office for National Statistics said last Friday that the UK economy had failed to achieve any growth at all in the second quarter. This was the worst quarter-on-quarter comparison for gross domestic product since the second quarter of 1992.
Surveys from the Chartered Institute of Purchasing and Supply have highlighted troubles in the service, manufacturing, and construction sectors moving into the third quarter.
Economists now see a significant danger of the UK entering recession - defined as two consecutive quarters of falling output - in the final three months of this year.
Capital, which is forecasting UK growth of 1.2% for 2008 as a whole, says of its revised projection for 2009: "We have long been more concerned than most other forecasters over the outlook for the UK economy.
"But three developments in particular have made us even more worried.
"First, the news on the domestic economy has been worse than we anticipated. GDP growth ground to a halt in Q2 and, with business surveys such as that from the CIPS consistent with a further slowdown, the economy looks likely to fall into recession in the second half of this year.
"Second, the economy now looks set to receive less support from overseas than we had hoped. Most notably, GDP in the euro-zone - the destination for around half of the UK's exports - contracted by 0.2% in Q2 and looks likely to be the first major economy to fall into recession. Meanwhile, the boost to the US economy from the fiscal stimulus already appears to be fading.
"And third, there is a growing danger that the downturn will be exacerbated by a contraction in bank lending to households and companies. Banks will struggle to raise enough capital to restore their capital ratios after the damage inflicted by the credit crunch and housing downturn. Accordingly, they will be forced to rein in their lending, with serious adverse effects on economic activity."
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