CLOUDS GATHER AHEAD ON OSBORNE’S BIG DAY

THE UK will fall victim to a second recession, a leading economic forecaster warned yesterday, pushing up unemployment and further damaging George Osborne’s hopes that he will be able to meet his deficit reduction target.

The figures will make for grim reading for the chancellor, who will today deliver his Autumn Statement just hours before millions of public sector workers walk out on strike, costing the economy around £500m.

Meanwhile, the debt crisis in the Eurozone is still escalating, with Eurogroup finance ministers due to hold an emergency meeting today to stop the contagion spreading from peripheral countries like Greece and Italy to formerly safe states like Germany and Belgium.

Forecasts from the Organisation for Economic Cooperation and Development (OECD), released yesterday, predict the UK economy will contract by 0.1 per cent in the last quarter of 2011 and a further 0.6 per cent in the first of 2012. These projections entail a £50bn black hole in Osborne’s books.

A sharper recession will come in the Eurozone, which is forecast to contract by 1.0 per cent and 0.4 per cent in the same quarters.

Any recovery in the UK is not expected to kick in until late next year, with growth of 0.5 per cent in 2012 and 1.8 per cent in 2013. Unemployment is forecast to rise from 8.1 per cent in 2011 to 9.1 per cent in 2013.

And today The Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, is expected to follow the OECD by downgrading its own forecasts. Lower growth means the government will have to spend more on benefits while collecting lower tax revenues – hitting Osborne’s plans to eliminate the structural budget deficit in five years’ time.

Osborne will announce an extension of free nursery places to 260,000 children. But he is expected to preserve cash by announcing a third year of pay restraint in the public sector, City A.M. understands. According to sources close to the Cabinet Office, any rise in public sector pay – frozen for two years in 2010 – may be capped at around one per cent in 2012-13.

Osborne is also expected to announce a series of micro-measures designed to boost flagging growth. Investors in start-up firms will be eligible for new tax reliefs; there will be £50m of government cash for fast-growing start-ups; and the rates holiday for 500,000 small firms will be extended by six months.

As first revealed in City A.M. last month, the chancellor is also set to announce a £250m package of reliefs for energy-intensive firms who have been hurt by new green policies.

Meanwhile, Europe’s finance ministers will today hold crisis talks to discuss options to save the Eurozone. Yesterday, Germany’s ministers again ruled out a jointly guaranteed Eurobond to finance troubled nations, and Angela Merkel’s government repeated calls for treaty changes to impose more central control on member countries’ finances.

The Bank of England’s Mervyn King said the solution was to transfer money from countries with good finances to those in trouble, as well as long-term labour market reforms.

However, the Eurozone faces a rapidly deteriorating economic situation. Yesterday, Moody’s warned “the probability of multiple defaults by Eurozone countries is no longer negligible. The longer the liquidity crisis continues, the more rapidly the probability of defaults will rise.”