The UK economy is already in recession, according to Resolution Asset Management, quoting the National Institute of Economic and Social Research’s monthly estimate of quarterly GDP.

The report predicted the UK economy contracted by 0.2 per cent over the three months to the end of August, which signals growth contracted in the third quarter as a whole, Resolution said.

Stuart Thomson, an economist at Resolution, said: “Economic conditions are set to worsen in the fourth quarter, according to leading indicators of mortgage applications, as well as the CBI’s industrial trends and distributive trades surveys.

“Immediate interest rate cuts are required, and given the collapse of the monetary transmission mechanism, these cuts have to be deep.”

Thomson said he believed UK base rates would fall to 3.5 per cent or less by the end of 2009.

Further, he said the financial sector required long-term funding that could only be provided by individual savers or the government.

Respecting the US economy, Thomson said: “With unemployment and risk aversion rising, as well as house prices falling, the relief rally in consumer confidence will translate into a significant improvement in retail sales in the near-term.

“The financial crisis began in the US and will only be ended by the US authorities, but the contagion to the rest of the developed world is clearly evident.”

However, Thomson said he expected the US dollar to remain the strongest global currency over the medium term, but that failure to provide adequate political leadership could cause a correction over the coming months. (Source: FT, 24/09/2008)

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