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2011 to see sluggish start, predicts CBI

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The first quarter of next year will be marked by slow growth, the CBI has predicted.

According to the employers’ group’s latest forecasts, job losses in the public sector, the 2.5 per cent rise in VAT and persistently high inflation will mean that the economy will expand by only 0.2 per cent in the first three months of 2011.

The growth rate should, however, pick up as the year progresses, rising to 0.4 per cent, 0.5 per cent and 0.5 per cent over the remaining quarters.

Overall, the CBI forecast that the economy will expand by 2 per cent throughout the course of 2011, climbing to 2.4 per cent in 2012, slower than the usual rate for a third year of recovery from recession.

Energy costs, the VAT hike and commodity prices should see inflation remain above the Treasury’s 2 per cent target ceiling for the whole of 2011, with the cost of living only beginning to subside in the first three months of 2012 and ending the year at 2.4 per cent.

The stubborn resistance of inflationary pressures will encourage the Bank of England at last to raise interest rates on a gently curve, the CBI said, reaching 2.75 per cent by the end of 2012.

While business investment plummeted during the recession, there are signs that it is recovering. CBI figures suggest that business spend will grow by 7 per cent next year and by 8.5 per cent in the year after.

UK exports are predicted to grow next year by 6.9 per cent and 8 per cent in 2012, with net trade expected to make a positive contribution to growth over the next two years as exporters benefit from a competitive level of sterling and sustained growth in most major international markets.

Ian McCafferty, the CBI’s chief economic adviser, said: “The pace of recovery in the UK economy has been slightly stronger over the past year than we and many others had expected, and somewhat faster than typical during the first year out of a recession. But we do not expect that rapid pace of growth to continue over the next two years of recovery.

“The big early kicker to growth from the turn in the inventory cycle has already passed and we are now starting to feel the impact of lower government spending. As a result, quarterly growth at the start of 2011 is likely to be very sluggish, although we do expect the recovery itself to stay on track.

“What is striking is how little we see growth accelerating in 2012. Typically, by the third year of a recovery, growth would be more robust than we expect for either 2011 or 2012.

“The persistent strength of energy and commodity prices is a growing concern, as it is likely to mean that inflation does not fall back quite as sharply as many hope. This makes it more likely that the Bank of England will need to start pulling back from record low interest rates earlier, rather than later, next year.”