Recovery predicted to be slow

economic_recoveryThe UK’s economic recovery will be “sluggish” this year and may not gain real momentum until the middle of 2011, the CBI has forecast.

In its latest economic report, the CBI argued that growth would remain precarious in the near-term as stimulus measures, such as the reduction in VAT and the car scrappage scheme, are ended or wound down.

A further brake on the rate of recovery will be the continuing reluctance of consumers to spend, with worries over job security encouraging more people to save.

According to the report, the economy is expected to expand by 0.3 per cent and then 0.4 per cent respectively in the first two quarters of 2010, and by a slightly faster 0.5 per cent in the next two quarters.

Only in 2011 will the rate of growth accelerate as global demand, consumer spending and business investment gather in strength. But, despite the improvement, the economy is unlikely to return to pre-recession levels before the end of 2011.

Overall, the CBI is predicting annual UK GDP growth of 1 per cent in 2010, followed by 2.5 per cent in 2011.

Increases in the base interest rate should see it reach 2 per cent by final quarter of 2011, the CBI added. Inflation, the business group believes, will fall back markedly this year after a higher than expected initial surge.

UK export growth will be supported by the strengthening global economy and the competitiveness of sterling, fuelling an export growth that should outstrip the growth in imports.

Business investment, which saw a sharp contraction last year, is expected to fall further in 2010, but recover in 2011 when economic conditions will be more favourable.

Unemployment is expected to peak in the autumn. The CBI estimated that the number of people out of work will be slightly lower than previously thought, at around 2.75 million.

Richard Lambert, the CBI’s director-general, said: “The economic outlook is improving, but the lack of a clear driver for growth will make for a bumpy ride in the months ahead. The CBI expects the recovery in 2010 to be slow and sluggish, with few signs of real strength until well into next year.

“Targeted spending cuts and smart re-engineering of public services can preserve front line services and deliver the savings that will have to be made. At the same time, it is vital that business has the space to grow, invest and create new jobs. That’s the only way out of our current fiscal mess.”

Ian McCafferty, the CBI’s chief economic adviser, added: “The state of the public finances means this recovery will be led by the UK consumer, private sector investment and the re-building of stocks. But headwinds from tight credit conditions and the desire to borrow less and pay down debt will hold this back somewhat.

“With inflation likely to fall back quite sharply due to the large amount of spare capacity in the economy, monetary policy will remain easy, though the Bank is expected to move away from the current emergency 0.5 per cent rate later this year.”

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