The British Chambers of Commerce (BCC) has also warned that the UK economy set to be even weaker in 2009. The current economic slowdown will be more prolonged than previously anticipated. It warned that businesses should prepare themselves for a long slog before the credit crunch is over. The Bank of England must take action to prevent a major downturn. The Bank of England’s Monetary Policy Committee left interest rates unchanged last week at 5% after lowering rates from 5.25% in April. Many critics say the Bank should be more aggressive in cutting borrowing to assist consumer confidence.

In its latest quarterly economic update, the BCC downgraded its forecasts for annual growth next year from 2% to 1.6% due to the sharp deceleration in consumer spending expected over the next 18 months, as a result of increasing household bills and falling property prices. According to the Ernst & Young Item Club summer forecast, The British economy will struggle to avoid recession and joblessness will rise substantially next year. Gross domestic product is predicted to grow by just 1 percent in 2009 and inflation is expected to stay above the target range of 1 percent to 3 percent in the next 12 months.

Ernst & Young expects oil prices to peak at $150 a barrel this summer, before easing back towards $100 over the next two years. Consumers would inevitably cut non-essential spending in the face of the impact of rising food and energy prices on discretionary incomes. Many parts of the leisure sector will be particularly hard hit. Consumers and government have over-borrowed on credit in the last few years and consumer spending was unlikely to defy gravity for any longer, while the public finances face a similar strain.

However, the households would be lucky to see real disposable income growth of 1 percent this year, with perhaps 1.5 percent in 2009. Consumer spending is tipped to grow by just 0.2 percent next year. Ernst & Young expects prices to drop by about 10 percent through 2008 and a further 6 percent through 2009. At the same time, it expects housing turnover to fall by about 35 percent this year and a further 10 percent in 2010, with all the usual effects on related spending. It said the correction in house prices was likely to be far greater outside London.

With consumer spending falling off sharply, the study expect a slowdown in the high street to pave the way for a rate cut, possibly as early as November. The weakening economy should allow the Bank of England’s Monetary Policy Committee to cut base rates this winter without running the risk of inflationary second-round effects. Ernst & Young economists expect base rates to fall to 4 percent by the end of 2009. This will help to put a cushion under the level of demand in the economy and set the scene for a recovery in 2010.

The British ratings agency Fitch said in its latest quarterly Global Economic Outlook that the British economy is one of the most exposed of the advanced industrialised economies to the impact of the global credit crunch and a U.S. recession. The agency’s GDP growth forecasts for 2009 have been revised downwards, while inflation, unemployment and interest rate projections have been revised upwards since the last report in April. The agency’s GDP growth forecasts for 2009 have been revised downwards, while inflation, unemployment and interest rate projections have been revised upwards since the last report in April.

Australia

According to the Organisation for Economic Co-operation and Development, Australia’s economy is set for a soft landing in the next couple of years as slowing economic growth helps pull inflation back down. Still, the Paris-based agency cautioned that the Reserve Bank of Australia (RBA) would have to stay vigilant on interest rates given strength in the country’s terms of trade. “Economic activity is likely to slow to below 3 per cent in 2008 and 2009 because of tighter financial conditions and the worsening external environment. This should ease pressures on the labour market and bring inflation down to under 3 per cent by the end of 2009.

Government latest figures showed the economy was still growing by a solid 3.6 per cent in the year to March, even as the RBA lifted interest rates to a 12-year high of 7.25 per cent. The central bank has been battling to control core inflation, which accelerated to a 17-year peak of 4.2 per cent in the first quarter. To avoid rising inflation expectations causing strong wage growth, monetary conditions need to be kept tight until domestic demand and price pressures have moderated sufficiently. In this context, the stabilising role that fiscal policy should play is welcome.

The government has targeted a budget surplus of 1.8 per cent of gross domestic product for the financial year to end-June 2009. A shift in expenditure, placing a stronger focus on infrastructure, climate change, education and health is also planned. This strategy should ease demand pressures to some extent. The OECD predicted GDP growth would slow to 3 per cent over 2008 and 2.75 per cent in 2009. It expected tighter financial conditions and mounting uncertainty to check household demand.

The Australian economy has experienced a long period of strong expansion. Real GDP in Australia has grown in each of the last 16 years at an average rate of 3.7% per annum, making it one of the strongest performers in the OECD over this period. Most recently, Australia has seen a rebound in growth from 2.7% in 2007 to 4.4% in 2008. Domestic demand has driven economic growth in Australia in recent years. While export growth in Australia has been dampened by a high exchange rate and low agricultural production due to drought conditions, consumer spending and investment have risen strongly as a result of factors such as a higher terms of trade, strong employment and wage growth, and high population growth.

An important driver of recent developments in the Australian economy is a strong rise in the terms of trade. The terms of trade in Australia rose 41% in the past five years after falling over much of the 1990s. This strong rise has led to high growth in national incomes. The terms of trade in Australia have been lifted by sharply rising prices for commodity exports. World prices for Australian commodity exports rose sharply in the last five years, led by base metals. Prices for Australia’s commodity exports have lifted further since the start of 2008 so, given the lags between spot prices and actual export prices, the terms of trade in Australia are expected to continue rising.

Strong domestic demand has led to heightened capacity constraints and inflationary pressures in Australia. Consumer price inflation averaged 3.0% per annum from 2005 to 2008, which is at the top of the medium-term target ranges of 2-3% for Australia. Sharp rises in commodity prices, particularly for oil and food, have added further to consumer price inflation recently. In the year to March 2008, consumer price inflation rose to 4.2% in Australia and may rise further in the short term. The labour market has tightened considerably in Australia, with the unemployment rate falling to an historic low of 4.0% and the rate of labour force participation rising to a record high of 65.4% in early 2008.

The economic outlook for Australia has weakened since the start of 2008. The Australian Treasury forecasts economic growth to decline to 2.7% in the June 2009 year as higher interest rates lead to a slowing of domestic demand, especially consumer spending. Interest rates have risen in the past year as a result of four official interest rate increases by the Reserve Bank of Australia and tighter credit conditions in global financial markets.

New Zealand

Ongoing growth in the Australian economy will continue to benefit New Zealand in the coming year, just not as much as in the past year. New Zealand’s economy may already be in recession and will post lower annual growth than forecast in May’s government budget. Data released over the past month had confirmed a sharp slowing in growth and weakness in the June quarter. It is possible that the economy has experienced a technical recession (when real GDP declines for two consecutive quarters) in the first half of 2008.

Economic growth in the year to March 2009 is expected to be weaker than forecast in the Budget Update, especially if oil prices remain elevated. The government has trimmed its forecast by half a percentage point to 1 percent.