Economy will be over worst by October, says Alistair Darling

The British economy will be over the worst of the downturn in six months, Alistair Darling will declare in his Budget.

The Chancellor is set to forecast that the economy will halt its fall in the last quarter of the year, which starts in October. He will predict a return to growth at the turn of the year, with a recovery well underway by the time of the next general election.

The outlook will draw political accusations of over-optimism, since some forecasters are much more pessimistic. The National Institute of Economic and Social Research this week suggested that economic growth may not resume until 2012.

However, some independent economists believe the Treasury position is credible: nearly half the City analysts polled this week by Reuters said the UK economy will at least stabilise in the last three months of the year, and some predict growth will resume then.

Despite bleak economic data and rising unemployment, government insiders say there are some reasons for cautious optimism, including last week's Bank of England credit survey suggesting banks are preparing to lend more to families and companies in the months ahead.

Some economists also expect the US economy to pull out of its recession in the second half of the year. President Barack Obama has said he sees "glimmers of hope" for a recovery.

And the Organisation for Economic Co-operation and Development said on Friday that although all major economies are suffering a major contraction, there are some "tentative signs of improvement" in the rate of decline in France and Germany.

The forecast of resumed British growth may be the only optimistic signal in an otherwise gloomy Budget. Mr Darling is set to accept that during a year-long contraction that started last year, the UK economy shrank by more than 3 per cent, the sharpest fall for a generation.

Faced with an ever-growing hole in the public finances, he will also announce long-term tax rises and spending cuts to try to balance his budget over the next six years.

There will be few eye-catching giveaways, although Whitehall discussions are continuing about offering a £2,000 "scrappage fee" to people trading in used cars for new models.

Despite reports that the Treasury has rejected the proposal by Lord Mandelson, the Business Secretary, sources said over the weekend that the plan remains "on the table".

In his last forecast at the pre-Budget report in November, Mr Darling predicted that growth would resume from the third quarter, which begins in July.

Although the Chancellor has since admitted that he understated the severity of the recession and will have to increase his estimate of the depth of the slump, in the Budget he will only move his prediction of renewed growth back by three months.

The Treasury is signalling it believes the British downturn could be 'V'-shaped, a steep fall followed by a relatively quick rebound. Stephen Timms, a Treasury minister this week signalled the Government expects growth to resume this year, adding: "The question is when in the second half of the year."

Signs of economic recovery around the New Year are vital to Gordon Brown's fragile hopes of winning a general election next spring.

Labour strategists also believe the party must appear optimistic about the future, accusing the Tories of "talking Britain down".

However, even if headline figures like gross domestic product are improving by then, unemployment - which lags behind economic growth - may still be rising as the Prime Minister goes to the polls.

Source: The Telegraph