The Latest News on the Falling Pound

The U.K. economy will shrink by 3.75% in 2009 and only begin expanding again by late 2010, the European Commission said on Monday in a dark assessment of the damage that the financial crisis will cause the UK. The commission's latest forecast marks another downgrade of the U.K.'s economic forecast. The commission's previous forecast for the UK economy, released in January, said the U.K. economy would contract by 2.8% in 2009. The previous economic forecast said the U.K. economy would grow 0.2% in 2010 compared with the current assessment of 0.1%.

The U.K. unemployment rate will increase to around 10% in late 2010 and average 9.4% for 2010, the commission said. This is an increase over its January forecast of an average unemployment rate 8.1% in 2010.

The commission also predicts a "very significant deterioration" in the U.K.'s public finances, as lower tax revenue and the U.K.'s economic stimulus measures will increase its budget shortfall to around 13% of gross domestic product in financial years 2009/2010 and 2010/2011.

The decline of the finance sector and the housing market, two very important factors of the U.K.'s strong economic growth over the last ten years, will reduce the revenue of the government even further, the commission said.

The sharp decline in the pound compared to other major currencies such as the euro, didn't increase significantly U.K. exports through most of 2008, with both import and export volumes remaining flat, the commission said. But the devalued pound should help the U.K. trade balance in the future, lifting economic growth by 1% in 2009 and 0.25% in 2010.