* * *

 By Philip Aldrick, Economics Editor

 
According to Fathom Consulting, the economy would shrink by 5.2pc in 2013 if the euro collapsed – a projection that former Bank of England deputy governor Sir John Gieve, speaking at Fathom’s quarterly Monetary Policy Forum, described as “modest”. In 2009, the worst year of the recent recession, the economy shrank by just 4pc.

The warning came as Moody’s, the ratings agency, lowered its UK growth forecast to just 0.4pc this year and 1.8pc in 2013, in the wake of the shock 0.7pc contraction in GDP in the second three months of the year. The Organisation for Economic Co-operation and Development separately said the economy would shrink this year as a whole.

Christophe Andre, acting head of the organisation’s UK desk, said: “The eurozone crisis is going to weigh on the UK in the coming months. Under these circumstances you cannot expect much more than very slow growth. GDP will probably fall in 2012.”

Despite the forecast cut, Moody’s did not change its “negative outlook” on Britain’s AAA rating. However, it warned of “rising challenges in achieving debt reduction within the timeframe laid out by the Government” and said the growth outlook “underscored” the UK’s problems. Last week, Standard & Poor’s reconfirmed Britain’s top-notch rating.

Fathom said it expects the economy to shrink by 0.3pc this year and bounce back to 1.4pc growth in 2013, but to slow down again as Britain’s “debt overhang” weighed on the recovery.

Although not his central forecast, Mr Gabay said a euro break-up would hit Britain hard because “the policy cupboard this time is nearly empty”. To prevent the pound strengthening in a euro crisis, he said the Bank would have to launch a £1 trillion round of quantitative easing.

Sir John added that the Government will have prepared contingency plans “to nationalise the banking system, for example” and warned that a euro collapse would leave Britain vulnerable to an attack from the markets. Speaking about the UK, he asked rhetorically: “If you think Europe’s going down the plughole, who’s next?”

DeAnne Julius, a former member of the Bank’s rate-setting Monetary Policy Committee, said companies have already begun preparations for a eurozone break-up but she warned that markets were not prepared and could inflict enormous damage. “The next global shock will be like an earthquake,” she said.

Sir John added: “The markets have hedged their bets so far. If they really believe the euro is breaking apart, they will go much further.”

Fathom was sceptical about the Government’s latest growth strategy, of Funding for Lending to lower the cost of credit, arguing that households needed to reduce their debt by about a third – or about £440bn. Ms Julius said that although it was “worth a try”, she “does not have huge hopes” for Funding for Lending. Sir John welcomed the effort , but said: “I don’t think it’s going to make a massive difference.”
Telegraph