Reading Time | 2 mins

CBI downgrades growth forecast

Share this article

The CBI has revised down its economic forecasts for the year.

The UK’s largest employers’ group said that it had made the amendments in response to the ongoing squeeze on household budgets and a slump in business confidence.

Its May forecast had the economy growing at 1.7 per cent for 2011. That figure has now been cut to 1.3 per cent.

However, GDP expansion, according to the CBI, should show a marked recovery in 2012, up to 2.2 per cent.

The news follows on from last month’s announcement from the Office for National Statistics that growth for the second quarter of the year was mired at just 0.2 per cent. The CBI predicted that third quarter growth should hit 0.8 per cent. Quarterly expansion is predicted to average between 0.5 per cent and 0.6 per cent throughout 2012.

Household consumption is expected to slide back by 1 per cent in 2011, the consequence of stubbornly high inflation, the hike in VAT and subdued pay settlements.

Meanwhile, business optimism about the future has been dented by the continuing crisis in the eurozone and by worries over levels of US debt, which together represent the UK’s largest export markets. This year is expected to see relatively modest investment growth of 3.7 per cent, but that should pick up in 2012 to 9.3 per cent, the CBI said.

The UK will still rely heavily on export drives to lubricate the economy. The CBI estimated an upturn in exports of 7.7 per cent in 2011 on the back of a competitive exchange rate.

In the business group’s view, inflation will be higher in the autumn and into next year than previously forecast, mainly as a result of increases in utility prices.

But as the impact of the VAT rise falls away, inflation is set to moderate during 2012 and dip back closer to the Bank of England’s 2 per cent rate towards the end of next year.

The CBI believes the Bank of England will hold interest rates until the first quarter of 2012 or at least until there is real evidence of a marked and sustained pickup in the economy.

John Cridland, the CBI’s director-general, said: “The economic outlook has become even more challenging but we still expect the economy to continue to grow modestly this year and next.

“The global economy has slowed in the face of several shocks including the Japanese tsunami and soaring commodity prices.

“These factors have combined with political uncertainties around the eurozone sovereign debt crisis, the wrangling in Congress over the US debt ceiling and the policy tightening in China, to erode confidence and soften activity.

“It may be a lacklustre recovery, but with solid net trade contributions and the positive impact of business investment, the UK will remain on a growth track.”

Ian McCafferty, chief economic adviser at the CBI, added: “Economic conditions will be very tough for the rest of this year as household budgets continue to be squeezed by a combination of inflation and weak wage growth. But conditions will be a little brighter in 2012 as inflation eases back and take home pay improves.

“We don’t expect the Bank to adjust interest rates until there are clear signs of a marked and sustained pickup in economic activity. This adjustment is now likely to come later than previously expected, in the first quarter of 2012.”