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UK GDP is estimated in our main scenario to fall by around 4.75% in 2009, with modest average GDP growth of around 0.75% in 2010 projected in our main scenario.
Consumer spending is estimated to fall by around 3.25% in real terms in 2009 due to the severe squeeze on consumer spending from high debt levels, tighter credit conditions, falling housing wealth and rising unemployment. We expect real consumer spending to fall by a further 0.25% in 2010 as households seek to reduce their debt burdens and return their savings ratios to more normal levels.
One of the key factors dampening consumer spending growth in our main scenario is a further projected rise in unemployment to a peak of around 3 million in the second half of 2010. All regions are projected to see rising unemployment over this period.
Business investment growth is also expected to remain weak, although this should gradually reverse during the course of 2010.
Destocking made a major contribution to the depth of the recession, but should now have a more positive effect on short-term GDP growth as this process goes into reverse. But this will be only a temporary effect and the question is whether growth can be sustained beyond that point.
Public spending growth will remain positive in 2009 and 2010, but will need to be cut back sharply in the medium term to bring under control a budget deficit that looks likely to be at or above the Treasury’s £175 billion projection for 2009/10. Significant tax rises are also likely to be needed from 2011 onwards, over and above what the government has already announced.
Net exports should provide a boost to growth this year and next as the world economy recovers faster than UK domestic demand, helped by the relative weakness of the pound (compared to typical 1996-2007 levels).
Risks around growth in our main scenario are more balanced than earlier this year, but are still somewhat weighted to the downside. We therefore recommend that businesses should stress test their plans and valuations against an alternative ‘prolonged recession’ scenario in which negative growth continues into 2010. But an upside scenario where growth rebounds to above trend levels by the end of 2010 can also not be ruled out.
Inflation is projected to be volatile in the short term, but should fall back below target by the end of 2010 given continued excess capacity in the economy. However, there are still considerable uncertainties around this relating to the path of global commodity prices, domestic demand growth and sterling.
The Bank Rate is assumed to be left at 0.5% until mid-2010 in our main scenario and to rise only gradually thereafter. We assume that quantitative easing is not unwound in a significant way until 2011 and beyond.
This issue includes a special article on global city GDP rankings in 2008 and projections to 2025. The latter reveal the growing significance of cities like Shanghai, Beijing, Mumbai, Sao Paulo and Moscow as the centre of economic gravity shifts from the G7 to the emerging markets. It also shows the importance of the big cities: the top 30 in our list accounted for an estimated 18% of total world GDP in 2008.

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