Britain should narrowly avoid recession, says CBI

The CBI has slashed back growth forecasts for 2012, but believes that the UK should narrowly avoid a double-dip recession.

It forecasts that output will grow by 0.9 per cent this year, lower than the 1.2 per cent predicted in November but still ahead of the 0.7 per cent pencilled in by the independent Office for Budget Responsibility.

The CBI also believes the economy will manage 0.2 per cent growth in the current quarter, bouncing back modestly from a decline before Christmas – and avoiding the two successive quarters of contraction which technically defines recession.

The more upbeat tone from theCBI follows a stronger recent run for Britain's manufacturers as well assigns of growing momentum among the UK's dominant services firms.

Despite electing to pump an extra £50bn into the economy last week through quantitative easing, the Bank of England is also likely to upgrade its own growth estimates on Wednesday to reflect slightly improved prospects for an economy seemingly headed for an inevitable recession last autumn.

John Cridland, CBI director general, said: "Economic conditions will continue to be tough, especially in the first half of the year, and the UK recovery will depend on the successful resolution of the eurozone crisis. But some activity has picked up since before Christmas and the mood among many businesses has improved, with exception of companies serving the UK consumer, where business remains flat. Although risks remain, we expect growth this year, improving modestly in 2013, primarily driven by positive net trade and business investment."

The CBI forecasters reckon the pace of growth will pick up to 2 per cent in 2013 – broadly in line with the OBR – but warned that unemployment is likely to peak at 2.9 million early next year.

With household budgets still under pressure until the cost of living falls back towards the end of 2012, the biggest boost to growth will come from business investment and trade.

The UK's trade deficit narrowed to its lowest level for more than eight years in December, with exports to the eurozone – Britain's biggest export market – holding up so far.

The European Central Bank pumped nearly €500bn into the financial system in December to stave off a second credit crunch among ailing European banks. Ian McCafferty, the CBI's chief economic adviser, added: "While significant risks in the euro area remain, the ECB's decision to inject more liquidity into the system has reduced the chance of a banking crisis."

BDO, the firm of accountants and business advisers, added to the more upbeat mood as its Optimism Index – which forecasts business confidence two quarters ahead – rebounded at the fastest pace in nearly a year during January. BDO still predicts a technical recession, but said its survey signalled that the economy will begin to recover in the second half.