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OECD says UK economy to shrink 1.1 %t in 2009

Britain's economy will shrink 1.1% next year and unemployment is likely to rise to 6.8% of the workforce, the Organisation for Economic Cooperation and Development forecast.

The Paris-based think-tank said British GDP - which contracted 0.5% between June and September - would probably start to expand again only late next year. Some 5.8% of the workforce currently cannot find a job.

“Given the dramatically weaker growth outlook and signs that inflation expectations are now declining, the Bank of England should continue to cut its policy rate rapidly, particularly because fiscal policy is constrained by the weak budgetary position,” the OECD said.

The OECD prepared its report before finance minister Alistair Darling announced over Ł20 billion ($30 billion) in fiscal stimulus in his pre-budget report on Monday, pushing British government borrowing to a record level.

Darling also gave a similar economic outlook to the OECD's for 2009, forecasting the economy would shrink 0.75-1.25%. But he was more optimistic about the strength of recovery in 2010, seeing growth of 1.5-2.0% compared with the OECD's 0.9% forecast.

The OECD said it expected house prices -- a big factor for consumer sentiment in Britain - to continue falling until they were 20% below the peak levels reached in late 2007, bottoming out in the second half of 2009.

House prices have already fallen more than 15% from their peak, according to data from mortgage lender Halifax. (Reuters)