Worse than the early 1990s

The 0.5% plunge in GDP in Q3 marked the start of the UK’s first recession in 17 years. And worse is to come. It is likely that the Government’s recapitalisation of the banks will not stop lending growth from slowing sharply. Meanwhile, house prices are likely to fall by another 20% or so and unemployment is set to rise by around 1.7 million. We think that the recession will last at least two years and result in around a 3% fall in output, thereby exceeding the 2.5% fall seen in the early 1990s. As a result, we think that interest rates will have to fall to an all-time low of 1%.