Light at the end of the economic tunnel

THE UK economy is stabilising with the worst of quarterly GDP falls behind us but it will take until the beginning of next year before a return to growth. 

That’s the verdict of business group CBI, which said today that it expects modest growth to resume during the first three months of 2010 with the pace of growth gradually picking up during next year.

It predicts that UK GDP, supported by low interest rates and quantitative easing, should flatten out during the second half of 2009, with quarter-on-quarter figures of -0.1% and 0% in quarter three and four, and modest quarter-on-quarter growth of 0.1% and 0.3% in the first two quarters of 2010.

Andrew Palmer, CBI regional director for Yorkshire said: “The world recession has deepened, so it is not surprising that the UK economy has continued to suffer.

“However, the harshest period of the recession looks to be behind us, the economy is stabilising and this should continue during the second half of this year.”

He added that some commentators had been “carried away” by recent tentative indicators as evidence of green shoots.

“It will take some time before we can be sure these shoots have roots we can depend on for sustainable growth and, in the meantime, the government must do everything it can to help firms get access to credit,” he continued.

The CBI expects that by the end of the recession the economy will have shrunk by a cumulative 4.8% – not as severe as the 5.9% seen in the early 1980s – after five consecutive quarters of falling GDP.

It also predicts that trend growth rates will be restored only by the end of 2010. For the year as a whole the yield will be an average annual GDP growth of a modest 0.7%. This follows a fall this year in GDP of 3.9%.

CPI inflation is expected to fall below the Bank of England’s target of 2% in 2009 quarter three and remain there throughout the forecast period to the end of 2010.

Quantitative easing is expected to continue for some months yet, but by the spring of next year, the Bank is expected to wish to return monetary policy gradually towards a more normal footing, with very modest increases in the official rate of interest from its current 0.5%.

Significantly, the labour market is proving to be even more flexible than hoped, with many more private sector employees accepting wage freezes and short-time working than in previous downturns.

This should help limit the pace of job losses through 2009, and the CBI now expects unemployment to peak at a slightly lower level than previously thought.

Unemployment is still expected to continue to rise until quarter two 2010 to a peak of around three million (9.6%), before edging lower during the remainder of 2010.

The CBI’s figures show household consumption shrinking by 2.9% in 2009, and growing only modestly in 2010 (0.5%) as consumer spending is constrained by rising unemployment, elevated savings ration and a modest rise in incomes.

Meanwhile, firms who reduced their stock at a rapid pace at the start of this year are predicted to start re-building their stocks next year.

The public finances are expected to be under growing pressure from the recession and net borrowing is expected to reach £172.3bn in 2009/10 and £182.2bn in 2010/11, representing 12.2% and 12.6% of GDP respectively.