Economic forecast

GDP forecast to contract sharply in the first half of 2009

The Budget 2009 economic forecast is for a contraction of 31/2 per cent, worse than the 1 per cent contraction forecast in the Pre-Budget Report. Gross Domestic Product (GDP) is forecast to contract sharply in the first half of 2009, to stabilise in the second half of the year, and to pick up progressively through 2010 and 2011 as credit conditions normalise and the effects of significant macroeconomic policy stimulus and the depreciation of sterling take hold.

The tightening of credit conditions facing households and companies, and the depreciation of sterling since mid-2007, provide the conditions for a rebalancing of demand in the UK economy. This macroeconomic adjustment is likely to entail increased saving by households, increased investment by companies as they respond to new opportunities, and a rebalancing of domestic and external demand.

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