British economic 'horror movie' to continue: think-tank

Britain's economic 'horror movie' will continue in the months to come, with growth slowing considerably, while unemployment will rise and inflation will remain above government targets, an influential economic forecasting group said on Monday.

The Item Club, which is backed by accounting giant Ernst and Young, predicts Britain's economy will grow by one percent in 2009, much slower than finance minister Alistair Darling's own forecasts of 2.25-2.75 percent, made when he delivered the annual budget in March.

Its report comes after Darling himself said in a newspaper interview published Saturday that the economic downturn here would be more "profound" than he expected, adding that the economic picture was "at the bottom end" of his range.

The forecasting group said that while the picture was not as bleak as the struggles that preceded a recession in the early 1990s, it was imperative that wages be kept in check so as not to let inflation, already at a 16-year high of 3.8 percent annually, get out of control.

"As with any horror movie, there is an escape route but it is not an easy one," the report read.

"It is imperative that wage increases remain restrained, despite the tremendous pressure from food and energy cost inflation... A general outbreak of wage inflation would spell disaster, requiring much higher interest rates and a recession in output to get inflation back under control."

According to the Item Club, house prices will drop on average by about 10 percent through this year, and a further six percent through 2009, and year-on-year inflation will remain above the government's two percent target for the coming 12 months.

Unemployment, meanwhile, will rise to two million by 2010, compared to 1.6 million at the end of last year.

"Both on the high street and in the housing market, it is going to get a great deal worse before it gets better," Item Club Chief Economist Peter Spencer said.

He added: "Consumers will inevitably cut back on non-essential spending in the face of the impact of rising food and energy prices on their discretionary incomes."