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Economy will be in growth again in 2010

BRITAIN&rsquo;S economy faces its stiffest test since the end of the Second World War with UK GDP expected to contract by 4.5 per cent in 2009 &ndash; the largest annual decline since 1945.<br /><br />According to the summer forecast from the respected Ernst &amp; Young Item Club, due for release today, growth will return in 2010, but a subdued recovery is forecast with a gain of just 0.5 per cent next year.<br /><br />The Item Club will today warn that hopes of a swift recovery from the recession are now running ahead of reality. It predicts the economy will not see a sustainable improvement until world trade begins to pick up.<br /><br />Peter Spencer, chief economic adviser to the Item Club, said: &ldquo;The economic patient has been in trauma, but thanks to the paramedics at the Treasury and the Bank of England who pumped billions of pounds worth of medicine into the economy, the patient has been stabilised for now.&rdquo;<br /><br />However, Spencer added it remained unclear how quick and complete recovery will be and there remains a serious challenge of a relapse. <br /><br />He said: &ldquo;Unfortunately it is hard to see any very solid grounds for sustained optimism at the moment. <br /><br />The only ray of hope is a potential recovery in world markets, which UK exporters can exploit because of the low level of the pound.&rdquo;<br /><br />The Item Club forecast is gloomy in outlook because credit remains constrained. It says the lack of competition among banks means lending to consumers and companies will continue to be expensive and restricted because there is unlikely to be more government stimulus available to work its way through the system.<br /><br />On Bank of England interest rates, the Item Club forecasts that the cost of borrowing will remain at 0.5 per cent well into next year, with the spare capacity for monetary policy ensuring only a gradual tightening after that.