Austerity cuts will dampen growth
Planned cuts in public spending, intended to tackle the UK’s largest peacetime budget deficit, will slow the economic recovery next year, the CBI has predicted in its latest forecasts.
The employers’ organisation said it expects the UK economy to continue to grow, and at a slightly faster pace in 2010 than had been expected. But the pace of recovery looks to be more sluggish in 2011 than previously forecast, following measures announced in the emergency Budget to deal with the deficit.
According to the CBI’s predictions, growth in 2010 will be 1.6 per cent, up from the 1.3 per cent forecast in June, the improvement the result of stock rebuilding among companies.
However, the CBI revised down its GDP forecast for 2011, from a previous 2.5 per cent to 2 per cent. This is because earlier predictions did not take into account the additional fiscal consolidation measures announced in the June emergency Budget.
The report was not, though, unduly pessimistic. The CBI believes that, although the level of uncertainty around the forecast remains high, a double dip back into recession is unlikely.
This is despite the fact that the outlook for consumer spending next year is now weaker since households will have less disposable income as a consequence of ongoing high inflation on the back of January’s upcoming VAT rise.
Consumer spending growth of 0.9 per cent in 2010 is likely to be followed by an equally anaemic 1 per cent in 2011, the CBI said.
Business investment will also be subdued, showing just moderate growth next year after having stabilised this year following record falls in 2009.
In the CBI’s estimate, UK exports are expected to grow by 3.5 per cent in 2010 and 6.4 per cent in 2011, while unemployment will rise at a more gradual rate, moving from an expected 2.49 million at the end of this year to 2.62 million at the end of 2011.
The forecasts predict that the Bank of England will adopt a slightly more dovish approach to interest rates, raising them only from next spring, perhaps to reach 1.25 per cent by the end of 2011.
Richard Lambert, the CBI’s director-general, said: “Our view is that the UK’s tentative recovery will be sustained, albeit with weaker levels of growth.
“The fragile nature of the recovery is why, in the forthcoming spending review, the government must focus its scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment.”
Ian McCafferty, the CBI’s chief economic adviser, added: “While the outlook for growth in 2010 has been lifted slightly, due to slightly faster economic activity in the second quarter of the year, the outlook for next year will be more restrained.
“The action to get the public finances back onto a sustainable footing will no doubt temper the recovery going into 2011.
“Consumer spending will be more constrained than previously thought, due to higher inflation resulting from next January’s VAT rise, and wage increases continuing to be modest. We do expect exports to grow at a faster rate than imports however, with net trade making a positive contribution to GDP growth during the coming 15 months.”