In its latest economic forecast, the UK’s leading business organisation has cut its GDP growth predictions for both 2008 and 2009, reflecting the sharper-than-expected slowdown over the first half of this year and the impact of weak consumer demand, high energy and commodity prices and the enduring effects of the credit crunch.
The growth forecast for 2008 has been downgraded from 1.7% to 1.1%. It looks as though the UK is in the early stages of a technical recession, with output in the economy expected to shrink by 0.2% quarter-on-quarter between July and September, followed by a further 0.1% decline in the fourth quarter.
However, GDP should stabilise early in 2009 ahead of a gradual and growing recovery, with quarter-on-quarter GDP growth reaching a near-trend rate of 0.6% by the end of next year. Nevertheless, for 2009 as a whole, the GDP growth forecast has been cut from 1.3% to 0.3%.
CPI inflation is forecast to peak at 4.8% this quarter, but thanks to an easing in commodity prices and the weaker economy, it is expected to fall back quite rapidly over 2009, reaching close to the Bank of England's 2% target by the fourth quarter (2.3%). Into 2010, there is a significant risk that inflation will undershoot the Bank's target.
Once the short-term inflationary pressures have peaked, the inflation outlook into 2010 will allow the Bank to make a series of rate cuts to bring the base rate down to 4.0% by next spring.
Richard Lambert, CBI Director-General, said: "Over the past year our forecasts for economic growth have been shaved lower and lower as the UK economy continues to struggle with the twin impact of higher energy and commodity prices and the credit crunch. Growth in 2009 will be feeble at best.
"Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived. This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged.
“The squeeze on household incomes and company profit margins from higher costs will begin to ease as the price of oil moves downwards and, although the credit crunch will be with us for some time, conditions are set to improve later in 2009.
"The Bank should have leeway to cut interest rates and, as inflation falls, we should be well placed to move beyond this difficult stage in the business cycle. If all goes well there should be room for a half point cut in November to help restore confidence in the beleaguered economy."
The CBI believes that unemployment will break the two million mark in 2009, reaching 2.01 million and a jobless rate of 6.5%. Average earnings growth is expected to remain fairly subdued, which will aid the improving inflation outlook.
Sharp rises in fuel and food costs, the resulting decline in real incomes and the troubled housing market have undermined consumer confidence and dampened household spending, and the CBI predicts that household consumption will contract by 0.3% in 2009.
Forecasts for investment have been downgraded, with fixed investment now expected to shrink by 3.5% in 2008 and by 4.0% next year, compared with flat growth predictions in the last CBI forecast. Much of this decline comes from the weak outlook for investment in buildings, as both residential and commercial property markets continue to struggle.
Net trade will be more supportive to UK GDP growth in 2009 as exports grow, helped by a more competitive pound, and demand for imported goods falls.
The public finances will be hit by the poorer outlook for the economy in 2008 and 2009. If no policy changes are made, the CBI estimates that net borrowing will hit £54.8bn in 2008/09 and £65.2bn in 2009/10, which represents 3.8% and 4.4% of GDP.
Ian McCafferty, CBI Chief Economic Adviser, said: "We now appear to be in a mild recession which will run to early next year. The outlook remains very uncertain, but we do not expect the falls in output to be prolonged, and should start to see signs of a recovery in the second half of 2009.
“The Bank of England’s hands have been tied in recent months by the relentless rise in inflation. But with oil prices heading lower, very weak economic activity for a good number of quarters, and little evidence of wage pressure, interest rate cuts will soon be justified, and will provide welcome relief to households and businesses.”
