June 24, 2008 | posted by Michael Baxter in UK economy |

Well it’s not going to be pretty, but we should avoid recession.

According to a report from human resources consultancy company Hay Group and the Centre for Economics and Business Research, the UK economy will experience another 18 months of slowing growth, which could hit profits to nigh on £1 billion, and result in up to 350,000 job cuts.  But, it says, the “UK will narrowly escape a full-blown recession.” 

The report was produced from research conducted among ‘senior business leaders.’

It found that business leaders expect profits to fall 1.9 per cent this year, which works out at around £900 million if extrapolated across the economy, but it expects profits to grow strongly in 2009/10, increasing by 2.7 per cent.

Interestingly, larger companies are expected to be hit harder, while financial services bosses are predicting an 8.4 per cent  profit reduction for this year.

But what about all this talk of pay restraint versus inflation?

The report says business leaders plan sharp job cuts in 2008/9, expecting their workforces to contract by 1.1 per cent on average – equivalent to around 350,000 job losses across the economy as a whole.  110,00 jobs are expected to be lost in the finance sector.

But this time round, unlike the 1970s, it thinks the job losses will mean wage inflation will be modest.  “Senior leaders also predict a slowdown in wage increases – falling to 3.9 per cent  in 2008/9 – with no return to last year’s rates predicted during the three years studied,” said a joint communiqué between Hay and cebr.

In a way then the job losses will be a good thing – not that it will feel like that for those afflicted.  If, instead, job losses were more modest, then wage inflation would pick up, interest rates would rise, and a full blown recession, which would be accompanied by many more job losses, would then follow.

In fact, while cebr expects inflation to be well above the Bank of England target of 2 per cent in the short-term, it predicts  consumer price inflation will dip to just 1.75 per cent in two years’ time.

The report predicted growth in GDP will be just 1.7 per cent this year, and 1.4 per cent next.    Capital Economics, by the way, predicts growth of 1 per cent or lower next year.

What cebr and Capital Economics have in common is the belief that 2009 will be worse than this year, that pay inflation will be modest and as a result, in the medium term, the CPI will fall below target.  

Remember, there is a month’s time lag before a change in the rate of interest has its full impact on the economy.  This means that if this report is right, and inflation is due to fall below target in two years’ time, the Bank of E could start cutting rates again in six months’ time.