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Predicting the shape of the U.K. economic recovery contains a huge amount of uncertainty, but the revival would be sluggish and protracted, a leading business advisory firm said Monday.
In its latest economic review, Deloitte predicts the economy to grow just 0.5% next year and then by 1.5% in 2011, which would be a lucklustre.
"We are therefore likely to see a much weaker economy than those typically seen after previous recessions. What's more, it is not impossible that the economy slips back into recession," Deloitte Economic Adviser Roger Bootle said.
There has been discussions among economists on what shape the British economic recovery will take, "U", "V" or "W", from a recession that was caused by a banking crisis. Bootle's remarks suggests a "U-shaped" recovery for the U.K.
Friday, official figures showed that the British economy contracted more than feared in the second quarter. GDP declined 0.8% quarter-on-quarter in the second quarter, after falling 2.4% in the first three months of the year.
Deloitte said even if the economy's potential growth rate has been damaged by the recession, growth is unlikely to be strong enough to eliminate the large amount of spare capacity that has built up. Deflation, rather than inflation, therefore remains the bigger risk.
The firm noted that with unemployment set to rise by another 1 million or so, pay growth will slow further raising concerns.
Given the current economic situation and an expected slow recovery, the firm said, expectations of an early tightening in monetary policy looked misplaced. Therefore, the Bank of England is likely to keep its key interest rate at its current record low level until the end of 2011.
Under the government's current plans, Deloitte forecasts that public sector debt, as a share of GDP, will not fall back below the 40% ceiling previously specified by the fiscal plans until 2035.
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