THE Prime Minister admitted for the first time yesterday that the UK is heading for a recession, as share prices tumbled and the value of the pound hit a five-year low.
Gordon Brown told MPs he backed the dire assessment of the economy made the previous night by Mervyn King, the Governor of the Bank of England.
Mr King's warning – the first official confirmation of what has been widely predicted by experts for
weeks – sparked an immediate drop in the value of the pound.
At one point yesterday, it was worth just above 1.62 US dollars – the lowest since September 2003.
London's FTSE 100 Index also fell more than 4 per cent as recession fears stalked stock markets, with commodity stocks worst hit on concerns over falling demand. On Wall Street, US stocks tumbled to five-year lows, with the Dow Jones closing down 5.69 per cent, at 8,519.21 last night.
Meanwhile, economists predicted that interest rates would be slashed again as soon as next month as the Bank of England attempted to stave off a deep recession.
The Bank's Monetary Policy Committee (MPC) could cut borrowing costs by 0.5 per cent in successive months for the first time in a decade.
During a fierce confrontation with David Cameron, the Tory leader, at Prime Minister's Questions yesterday, Mr Brown said: "Having taken action on the banking system, we must now take action on the global financial recession which is likely to cause recession in America, France, Italy, Germany, Japan and – because no country can insulate itself from it – Britain, too."
Mr Cameron repeatedly challenged the Prime Minister to admit that he had not – as he had previously claimed – abolished boom and bust and admit some blame for the present economic problems. But Mr Brown side-stepped the question and insisted it was right to stimulate economic activity by borrowing in a downturn.
He insisted his "undivided attention" was on helping families and businesses through the slump and suggested that Mr Cameron was talking down the economy.
Meanwhile, minutes of this month's emergency MPC meeting showed the nine-strong committee voted unanimously for a 0.5 per cent cut along with several other central banks at the height of the turmoil.
Pressure for deep cuts is likely to mount further tomorrow, when official figures are expected to confirm a shrinking UK economy for the first time since 1992.
"We expect to see a 0.5 percentage point cut to 4 per cent in November," Global Insight's Howard Archer said.
Capital Economics' Vicky Redwood said rates could fall to 2.5 per cent – the lowest since 1951 – or even an all-time low of 2 per cent next year.
The MPC would continue to "act aggressively", she said.
Ms Redwood added: "Not only did all members vote for the 0.5 per cent cut, but the discussion was unambiguous. The case for leaving rates on hold – or indeed cutting by 0.25 per cent – wasn't even discussed."
On Tuesday night, Mr King told business leaders in Leeds the banking freeze increased the "risk of a sharp and prolonged slowdown in domestic demand". He added that the country's banking system also came closer to collapse during recent weeks than at any time since the First World War.
This came after an "almost unimaginable" chain of events was set in train by the collapse of Lehman Brothers in the US last month.
