Publishing its latest economic forecast, the CBI said the continued uncertainty in the eurozone, and the resulting weaker prospects for exports and investment have led to a marked drop in business and consumer confidence, and as a result the CBI has revised down its forecast for the UK economy.
The UK’s leading business group now expects GDP growth to be 0.9% in 2011 and 1.2% in 2012, down from 1.3% and 2.2% respectively.
However, the CBI believes that weak economic performance and growing fiscal instability in the eurozone make it even more important that the Government safeguards the UK’s AAA credit rating.
John Cridland, CBI director-general, said: “The Government must stick to its plans to bring down the deficit to maintain confidence in the UK’s public finances and keep the cost of borrowing down, but now is the time to revitalise its growth strategy and create a “Plan A plus”.
“In uncertain economic times, confidence falters, investment grinds to a halt and job opportunities fade. This package of measures taken together could make a real difference to the economy, creating jobs and boosting growth in the years ahead.”
In its latest quarterly economic forecast, the CBI predicts that unemployment will continue rising next year, peaking at 2.75m in Q4 2012.
Inflation is expected to fall back from Q1 2012 onwards, as this year’s VAT rise drops out of the equation, reaching the Bank’s target rate of 2.0% in Q1 2013.
Given the weaker prospects for domestic growth, the CBI expects interest rates will remain at their historic low of 0.5% throughout 2012, and start edging upwards only from 2013.
Weaker UK growth and the ongoing eurozone turmoil have dented business confidence and, despite a cash surplus in the corporate sector, firms’ investment plans are being pared back. Total business investment is expected to grow by just 0.6% in 2011, down from 3.7% in the previous forecast, and 6.9% in 2012, down from 9.3%.
The CBI forecasts quarter-on-quarter GDP growth to be 0.0% in Q4 2011 and 0.2% in Q1 of 2012.
Ian McCafferty, CBI chief economic adviser, said:“The recent turbulence in the eurozone has seriously dented business confidence, which has led to a reappraisal of investment and export prospects.
“Survey evidence points to economic growth having stalled in coming months, resulting in a significantly weaker outlook for the year ahead. We expect UK GDP growth to be flat in the fourth quarter and rise only very slightly in the first quarter of 2012.
“We still think we can avoid a double dip, but the risks have increased.”
Ahead of the autumn statement the CBI is urging the Government to consider a range of measures to help kick-start growth, at little extra cost to the Exchequer.
Its proposals range from actions to boost investment in infrastructure, stimulate the housing market and improve the roads, to supporting energy intensive industries, reforming the electricity markets and tackling youth unemployment.
Cridland said:“We are highlighting ways that the Government can boost the economy, at little extra cost to the Exchequer. To unlock private sector investment, kick-start growth and create jobs, we need the Government to deal with the road blocks on planning, energy reforms and in areas like the 4G spectrum auction.
“We also urge the Chancellor to protect our energy-intensive industries, tackle youth unemployment and unfreeze the housing market.
“The Government should introduce road-tolling and bring forward ten major road infrastructure projects, getting spades in the ground, improving congestion and creating new jobs.”
