Recovery likely to be protracted warns CBI
RECOVERY in the UK economy is staying on track but will be protracted as urgent action is taken to reduce the budget deficit, the CBI said today.
The leading business group is forecasting slightly faster growth in 2010 after a strong pick-up in manufacturing activity.
In its latest economic forecast, the CBI predicts that the UK economy will grow by 1.3% in 2010, up from 1% in its previous March forecast.
The slight upward revision reflects the relative strength of the economy over recent months, with industrial production showing solid growth and overseas demand for UK-made goods strengthening, buoyed by the relative weakness of Sterling.
The GDP forecast for 2011 remains unchanged at 2.5%.
Looking at quarter-on-quarter growth, after posting first-quarter growth of 0.3% this year, the CBI expects the economy to grow by 0.8% in the second quarter, followed by slower rates of 0.5% and 0.4% in the latter half of 2010. Quarterly growth is then forecast to pick up slightly from 0.6% to 0.8% over the course of 2011.
However, the outlook remains uncertain, particularly with government spending expected to fall sharply, as much-needed steps to restore the public finances are taken in the forthcoming emergency Budget, the CBI said.
CBI Director-General Richard Lambert said: “Over the last three months the political and economic backdrop at home and abroad
has shifted dramatically.
“Turbulence has returned to global financial markets as concerns about European sovereign debts have intensified, underlining the need for the UK to tackle its large budget deficit urgently.
“Although the risks to the economic outlook have increased, our view is that the UK’s tentative recovery will be sustained.
However, economic growth will be weak and we do not expect a return to pre-recession GDP levels until 2012.
“It is clear that the private sector will have to be the main driver of economic growth to offset lower government spending. It is thereforeessential that next week’s emergency Budget creates the right conditions for businesses to drive growth and create new jobs, as well as setting out bold action to repair the public finances.”
Against a backdrop of higher inflation and relatively weak wage growth, household spending is forecast to struggle this year, growing by 0.4%. Stronger growth of 2.2% is expected next year as the labour market improves. Household savings are expected to remain at high levels, before falling back through 2011.
Business investment is expected to stabilise this year, following last year’s record contraction. But it will recover sluggishly, as firms are lumbered with spare capacity and take a cautious approach to spending decisions in the face of continuing economic uncertainty.
Inflation in recent months has come in higher than previously forecast following the increase in VAT, higher oil prices and increased import costs after Sterling’s decline. However, it is predicted to fall back sharply over the coming year, dropping below the Government’s 2% target in the second quarter of 2011, the CBI said.
It said the Bank of England was expected to move away from the current emergency stance and nudge interest rates higher later this year. But monetary policy is expected to remain loose over the forecast period, with interest rates reaching 2% by the end of next year.
UK exports are expected to grow by 5.3% in 2010 and 6.9% in 2011, with net trade expected to make a positive contribution to quarterly GDP growth rates through to the end of 2011.
Unemployment is expected to peak at 2.7m early next year and to fall only slowly thereafter.
Public sector net borrowing is forecast to reach £152bn in 2010/11, before falling to £128bn in 2011/12, representing 10.4% and 8.4% of GDP respectively, the CBI concluded.
Elsewhere, the new fiscal watchdog, the Office for Budget Reponsibility is expected to forecast that growth predictions by the last Labour Government were over-optimistic and that as such, further cutbacks in public spending may be inevitable as less money flows into Treasury coffers during the next year.
