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Over-optimistic forecast on contracting GDP

Chancellor Alistair Darling has conceded that his previous GDP forecasts were over-optimistic and UK GDP will contract by 4.75 per cent in 2009.

In his April Budget, the Chancellor predicted that GDP would contract by 3.5 per cent over 2009 but in his pre-Budget report he admitted that GDP will have contracted by 4.75 per cent by the end of the year.

Despite this, the Chancellor forecast that the recovery will be under way in Q4, 2009 and that growth will be between 1 per cent and 1.5 per cent in 2010, 3.5 per cent in 2011 and remain unchanged in 2012.

Darling also predicted that the consumer price index would increase to 3 per cent at the start of 2010 but fall back to 1.5 per cent by the end of the year.

The Chancellor admitted public borrowing increased from a predicted £175bn to £178bn in 2009 but for 2010 borrowing would continue at £176bn. He said it will be £140bn in 2011 but would reduce to £82bn, or 4.4 per cent of GDP, by 2015.

He said: “Because of the und-erlying strength of our econ-omy, the pick-up in world dem-and and the substantial spare capacity opened up by the recession, my Budget forecast, broa-dly in line with the Bank of England, remains unchanged.”

KPMG chief economist And-rew Smith says: “If the buoyant growth forecast is to be achieved, the structure of the economy will have to change drastically. In future, growth will have to be more durable and built on savings, investment and exports.”

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