BRITAIN faces the worst economic outlook since the early 1980s, according to the Financial Times’ annual survey of leading economists, which shows considerable concern that the Treasury’s forecast of a recovery in the second half of the year is too optimistic.

The survey also shows that two-thirds of economists thought the government lacked a credible policy for restoring health to public finances. A similar proportion thought the modest tax cuts and public spending increases to be desirable.

A large majority of the 67 economists surveyed believed unemployment was likely to rise close to three million and that house prices would continue to fall throughout 2009.

Although only two in five thought persistent deflation was a serious risk for 2009, a majority believed the Bank of England should start this year the unorthodox policy of printing money to buy assets to ward off the threat of a more serious economic downturn.

Meanwhile, the misery in Britain’s construction industry has deepened, with activity shrinking at the fastest rate since records began more than a decade ago. Falling house prices and a shortage of credit have taken their toll on the construction sector.

The construction index compiled by the Chartered Institute of Purchasing & Supply and Markit fell to 29.3 in December from 31.8 the previous month. It is the 10th consecutive month the purchasing managers index (PMI) has fallen below 50 – the level marking contraction – and the lowest level since the series began in 1997.

Further falls in global demand resulted in the most severe retrenchment in the PMI’s 11-year history. Once again, the housing sector bore the brunt of the crisis as purchasing managers reported significant reductions in new business.

The housing market continues to worsen, with the average price of a home in Britain now down a record 16.2 per cent from a year ago, according to Halifax, and the number of new mortgages approved has hit a fresh record low.

The data over the last month have made it look much more likely that GDP will fall very sharply this year. The National Accounts revealed that GDP fell in Q3 by 0.6 per cent , worse than the previous estimate of a 0.5 per cent drop. What’s more, the further falls in the CIPS/Markit PMIs suggest that the economy may have contracted by one per cent in Q4.

The Capital Economics Ltd., a London based research firm believes GDP will fall by 2.5 per cent in 2009 and a further one per cent in 2010. This, together with the growing threat of deflation, will prompt Bank of England’s Monetary Policy Committee to cut interest rates to, or very close to, zero and to pursue more unconventional policies to boost the quantity of money.

Output and industrial indicators have shown the recession deepening and becoming more broad based. Activity in all the major sectors of the economy contracted in Q3. Household indicators show a further deterioration in the housing market. Meanwhile, large price cuts appear to have been only modestly successful in getting consumers shopping.

External indicators suggest that the lower pound has yet to boost the UK’s exports. Instead, exporters are struggling to cope with the weakening in demand in overseas markets.

Labour market indicators have confirmed that unemployment is rising at a rapid pace. Job vacancies have fallen further and the redundancy rate has shot up. Inflation indicators showed inflation taking another step along the road to deflation in November. Price discounting on the high street has since intensified.

Monetary/financial indicators have reacted to the growing possibility of zero interest rates. In particular, bond yields have fallen very sharply.

During a recent interview on the BBC’s Andrew Marr Show, Prime Minister Gordon Brown said he wanted to see a return to banks doing what they should be—“lending”, and he ruled out any further bank bail-outs, saying any solution needed global cooperation.

Mr Brown also gave more details about a programme to create 100,000 jobs as part of a new initiative to curb rising unemployment and help the economy to stabilise.

Defending his use of fiscal policy, Mr. Brown said: “ If the monetary system is not working as well as it should; if there’s no likelihood of huge inflation in the next period of time; if you are not crowding out private investment then government must play its role.” The government plans to bring forward £10bn of spending on public works, digital technology and environmental projects to create new jobs.

Calling re-capitalisation” necessary for the survival of British banks, Mr Brown said: We have got to accept we have lost some of the bigger players in this market, so existing institutions are going to have to do more.

Some 30, 000 jobs are to be created in school repairs in an attempt to help private construction firms who have suffered in the economic downturn. Mr Brown also claimed his plans would be bigger than the multi-billion dollar “Green New deal” planned by US president-elect Barak Obama.

For a year or more now, the US and UK governments have been fighting the financial meltdown by trying to get the banks to perform their proper function of lending credit to businesses and households and thus boosting demand across the economy.

In the October bail-out of the banks, a staggering £500 billion (more than one-third of UK GDP) was made available to the banks to kick-start lending.

The problem with all these measures remains enforceability. The three banks that accepted taxpayer funds – RBS and Lloyds TSB plus HBOS – were told by the government as a quid pro quo to maintain lending to businesses and homeowners at 2007 levels. That has certainly not happened.

But the Treasury cannot even, in the midst of a devastating credit crunch, get access from the banks to what the credit flows actually are. The government is considering guaranteeing a range of new loans on condition that the banks are set strict targets for lending this year as the recession deepens. But, again, how will this be enforced?

Michael Meacher of the Guardian (January 5) says that in these circumstances, the only certain way to ensure that lending is resumed on the scale desperately required is to take public control of the banks, temporarily at least, to avert the worst crash since the Great Depression.

“Now that neo-liberalism is wholly discredited, is that still a taboo too far? He asks and says in reply. ”I think not.”