CBI cuts growth forecast

THE CBI is predicting a “bumpy ride” for business over the next two years as rising inflation and turbulence in the financial markets continues to trouble the economy.

The CBI has downgraded its 2008 outlook for UK growth, and is forecasting even slower growth in 2009 due to continued troubles in the credit markets, rising

commodity prices and weak domestic and global demand.

In its latest quarterly economic forecast published today, the UK's business group has lowered its figure for this year's rate of GDP growth down 0.2% to

1.8%.

The forecast for next year has also been downgraded and the CBI's figure of 1.7% GDP growth for 2009 contrasts with the Chancellor's more optimistic forecast in the recent Budget of between 2.25% to 2.75%.

The CBI expects that the CPI rate of inflation will peak at 3.2% in Q3 of 2008, forcing the Governor of the Bank of England to write a second letter to the Chancellor.

This compares with 2.7% predicted in the previous forecast.

However the CBI said that the slowing will bring inflation down in the longer term.

The CBI said it expects the Bank of England to cut interest rates in the second and fourth quarters of this year, with one more reduction early next year – which could bring interest rates down to 4.5% by early 2009.

Richard Lambert, the CBI's director-general said: “”Outside the financial and property sectors the overall mood of business is, however, nothing like as gloomy as you might guess from reading today's headlines. While there are signs of a high street slowdown and some firms say it's getting harder to raise bank finance,around the country many still report quite positive conditions. So it is vitally important to keep the story in perspective. Although painful, write-offs by British banks represent a tiny fraction of their capital. After a few good years, the UK corporate balance sheet is in good shape. Our flexible labour market is a real force for stability and our best bet is still that our economy will continue to show modest growth this year and next, before starting a gradual recovery.”

The biggest downward revision in the CBI's forecast has been to household spending, as purchasing power is heavily squeezed by higher food and energy prices.