Building society predicting lengthy economic recovery.

Byline: Iain Laing

BUILDING society Nationwide has forecast a protracted recovery from recession and interest rates at record lows until "at least" the final quarter of next year.

Nationwide said it expected rising unemployment would "inevitably" push house prices down in 2010.

The gloomy predictions came as the UK's biggest building society's underlying pre-tax profits slid to pounds 117m in the six months to September 30 - 63% below last year's pounds 322m.

Chief executive Graham Beale said Nationwide's performance was squeezed by low interest rates and the "dramatic fall" in commercial property valuations - cutting margins and lifting impairment charges.

These bad debt provisions came to pounds 317m, compared with pounds 74m in the same period last year and pounds 320m in the six months to April 2009.

Mr Beale said the charges were in line with expectations and highlighted the firm's ability to remain profitable despite challenging markets.

But he warned: "Economic recovery is forecast to be slow and we expect interest rates to remain at their current level until at least the fourth quarter of 2010. We are also cautious on future prospects for the housing market. The growth in house prices over recent months appears to be driven by lack of supply, and growth in unemployment throughout 2010 will inevitably exert downward pressure on house prices."

Bad debt charges on commercial property loans rose to pounds 180m, from pounds 146m in the previous six months and pounds 25m in the same period last year.

Nationwide predicted the declines in the commercial property market had reached their bottom and said related losses in the second half would be no worse and "may even be better" than the first six months of the financial year.

But the building society said that unemployment, which has lagged behind the economic downturn, could rise next year, potentially pushing up arrears in the residential loan book.

The mutual said the proportion of its residential mortgage accounts three months or more in arrears was 0.66%, compared with an industry average of 2.4% at the end of September. For commercial property, the proportion of loans originated in its business that had fallen more than three months into arrears increased to 2.34%, from 1.62% in the six months to April.

Nationwide has not needed support from the taxpayer and instead shored up weaker rivals, taking over Derbyshire and Cheshire building societies and buying the savings assets of the ailing Dunfermline in March.

The mutual predicted building society annual results due in February could prompt more consolidation among its rivals.

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OUTLOOK Nationwide is forecasting a slow recovery from recession.