The world economy was hit by a succession of shocks during 2007 and 2008. The United Kingdom, like most OECD economies, is experiencing a severe economic downturn, and there is enormous uncertainty about the macroeconomic outlook. Since the peak, GDP has contracted by 4.2% in real terms and is projected to contract further, with a decline of 4.3% expected in 2009. Lower house prices and the slump in equity prices will depress household consumption, together with rising unemployment and weak consumer confidence. Business investment will decline owing to the challenging prospects and tight financial conditions. While sterling has depreciated by around 20% in effective terms since 2007, exports will decline due to the sharp fall in external demand. However, imports are expected to fall faster meaning that net exports will contribute positively to growth. The unemployment rate is rising sharply and could be close to 10% by 2010. Monetary and fiscal stimulus, the weaker exchange rate and some recovery in foreign demand should promote a recovery during 2010. But, this will depend critically on whether measures to stabilise the financial system are effective. Even if they succeed, growth is expected to remain well below trend as households and firms rebuild their balance sheets. The passthrough of higher import prices will slow the decline in inflation in the early part of 2009 but the weakness of demand will create substantial spare capacity in the economy, which will lead to inflation well below the official target for some time. The extent of the global downturn on activity is unclear. A slower than anticipated return to normal financial conditions would have a negative impact on the economy. Greater than anticipated declines in house prices could weigh further on consumption and increase the feedback by exerting further pressures on banks’ and households’ balance sheets. Significant monetary and fiscal policy stimulus is in place, and although it may not prove as effective as hoped, it is possible that the policies will have a faster and stronger positive effect than anticipated.