Treasury fears that UK exports will dry up

The Treasury warned in the Pre-Budget Report that UK export markets will grow by just 0.5% in 2009, compared with 6.75% in 2007 and 3.75% in 2008.

It marked a significant downgrade of almost six percentage points from the forecast made in the March Budget and came as the meltdown in financial markets on both sides of the Atlantic spreads to the wider economy.

The appalling state of the economies of our biggest trading partners was laid bare tonight as it emerged that the US economy shrank even more severely in the third quarter of the year than had been first thought. The US Commerce Department changed its estimate for GDP from a 0.3% decline to 0.5%. That took it to the biggest fall in GDP since the 2001 World Trade Center attacks.

The shocking revision to UK export forecasts sparked fears that hundreds of firms will go bust over the next 12 to 18 months with the loss of thousands of jobs. Nearly 700,000 manufacturing jobs were lost between 1990 and 1992 and the sector now employs around three million people.

Steve Radley, chief economist at the manufacturers' organisation EEF, said: "There are significant numbers of manufacturers who will be under real pressure next year.

"There have not been that many job cuts so far but there are a lot in the pipeline. Although companies have gone into this recession in much better shape than before, this is looking as serious as the 1990-1992 downturn."

Exports have kept many manufacturers afloat over the past year as the dire state of the economy hit demand for goods at home. For two-fifths of manufacturers, exports account for half or more of their revenues.

The weak pound, which has sunk to record lows against the euro and lost a quarter of its value against the dollar in four months, has boosted exports.

Bank of England deputy governor Charles Bean said a weak pound is good for manufacturers. "Think how much worse it would be if exporters didn't have the advantage of a much more competitive level of sterling now than a year ago," he said.

Despite this, the Treasury says recession in Europe and the US - Britain's biggest trade partners - means demand for British goods will all but evaporate next year. The PBR says: "Recent strong import demand from Europe is not expected to continue in 2009, while recession in the US is also likely to reduce demand for UK exports."