World set for worst recession since war, says think tank

THE world is heading for its worst recession since the Second World War, a leading economic think tank said today.

Capital Economics said the credit crunch and meltdown in the banking system meant the global economy faced its biggest crisis for more than 60 years.

It warned that Britain would be the hardest hit of all the major economies with the recession worse than in the early Nineties.

The report came as wave after wave of bad news buffeted economies around the world. House prices and confidence among consumers and business have collapsed while unemployment, repossessions and bankruptcies are rising. "Our growth forecasts had already been at the very low end of the range, but the incoming data has convinced us that the world economy is heading for its worst recession since the Second World War," said Julian Jessop, chief international economist at Capital Economics.

He said the authorities were finally addressing the problem, through bank bail-outs and interest rate cuts.

He expects the Bank of England to cut rates from 4.5 per cent to at least 3.75 per cent next week, but argued that a more aggressive reduction was needed the rate should eventually fall to as low as one per cent. "To their credit, policy makers now appear to recognise the seriousness of the situation and are starting to deploy the full arsenal of weaponry to forestall a Thirties-style depression," said Mr Jessop. "The measures taken to stabilise the financial system should prevent a complete meltdown.

"Nonetheless, the unwinding of the massive economic and financial imbalances built up over the last decade requires a long and painful hangover. The financial crisis is far from over and bank lending will be severely constrained for years.

"Consumers, especially in the US and the UK, need to rebuild their savings at the expense of spending."