Britain faces 'slow recovery and lower living standards'

Britain's economic recovery will be "fragile, slow and protracted", the Confederation of British Industry (CBI) predicted yesterday.

While the employers' organisation seems confident that the UK has emerged, technically, from recession in the past few months, it stressed that 2010 would be a "tough" year economically, with falling living standards and growth that would actually fall back slightly in the new year, fuelling fears that the UK could experience the much-feared "double dip" or "W-shaped" recession.

"We do worry that it is going to be weak," said the CBI's chief economist, Ian McCafferty. "As the stimulus is withdrawn it leaves the economy at risk of a further slowdown."

Overall, the CBI forecast that GDP would shrink by 4.3 per cent in 2009 and grow by 0.9 per cent in 2010. It sees unemployment peaking at three million in the second quarter of next year.

Richard Lambert, director general of the CBI, added: "Armageddon has receded a bit over the horizon. The outlook is improving as the UK draws strength from quantitative easing, a weak pound and a recovering global economy. Although growth this quarter should mark the end of the recession, conditions will remain tough for some time yet and it is difficult to see where demand growth will come from."

In its latest economic outlook, the CBI said the economy would expand in the third quarter of this year, by just 0.3 per cent – for the first time since spring 2008. Growth would accelerate to 0.4 per cent in the run-up to Christmas as shoppers brought forward their spending in advance of the VAT increase scheduled for 1 January, it added.

However, growth is then set to fall back to close to stagnation, at 0.1 per cent in the first three months of 2010, and 0.3 per cent in the following quarter, the business group warned. The CBI's projections are much more pessimistic than those of the Treasury in April's Budget, which suggested a 3.5 per cent contraction this year and a 1.25 per cent growth rate for next year.

Mr McCafferty said he expected the Bank of England to raise interest rates to 2 per cent next year, and for Government borrowing to balloon to £182bn.

He called on all the political parties to come up with a "credible plan" to return the public finances to a sustainable footing, though not at the price of "indiscriminate" cuts in public spending. Investment, he said, remained "particularly weak" and down by almost a fifth this year.

Household consumption would fall next year as incomes were squeezed and individuals chose to pay off debts and save, he added, dropping by an estimated 3.2 per cent this year and again by 0.2 per cent in 2010. Excess capacity in the economy is running at 6 per cent, according to the CBI's latest estimates, and bank lending would continue to be constrained by the need for lenders to deleverage and rebuild their balance sheets.

Mr McCafferty said the Bank of England's policy of quantitative easing had "not yet had an enormous impact" on bank lending, adding: "While access to finance has improved noticeably since the turn of the year, when the credit markets were really frozen up, bank lending and money supply growth still remain a cause for concern."

House prices would fall by 9.8 per cent this year and recover to a 0.8 per cent increase in 2010, the CBI said.

Mr Lambert added: "Firms that have run down their stocks will now be starting to raise output to meet demand, and consumers are likely to bring forward spending before VAT rises. But once these two boosts are out of the way, there is no clear driver of robust economic growth into 2010.

"Growth next year will remain very weak, while job losses will continue and household consumption will stay tightly squeezed. The sharp fall in business investment this year is a real concern, as are the public finances, and both will affect UK economic prospects in the years to come."