British economy faces long hard slog to real recovery

Britains' economy will finally make it out of recession in the last quarter of 2009, but will perform much less strongly in each of the next three years than the Government is currently forecasting, the CBI will say today.

The UK's biggest business group is expecting a weak economic recovery during 2010, followed by two subsequent years of disappointing growth, with only moderate improvements in employment and wage settlements.

The CBI predictions are markedly lower than those made by Alistair Darling, the Chancellor, in his pre- Budget report (PBR) two weeks ago.

Next year, the business group is forecasting growth of 1.2 per cent – near the bottom end of the range of 1 to 1.5 per cent that Mr Darling forsees. Thereafter, the CBI is forecasting growth of 2.5 per cent in 2011, which would be insufficient to return Britain to its pre-recession growth rate by the end of the year. The Chancellor, by contrast, expects the British economy to grow by 3.5 per cent in both 2011 and 2012.

The CBI's forecasts reflect its view that the outlook for consumer spending is worrying, with tax rises and unemployment continuing to dog confidence. This downbeat assessment will worry ministers, who are acutely aware that Mr Darling's promise to get on top of Government borrowing is dependent on the economy hitting the growth targets he has set.

John Cridland, the CBI's deputy director general, said that while Britain is probably through the worst of its economic difficulties, there is little reason to be particularly upbeat going forwards. "The outlook is brightening as the global economy finds its feet, although we will need to keep our nerve during early 2010 and there is no sign of a clear driver of strong economic growth," he said. "In the spring, many staff will face another cycle of wage freezes, and job losses will continue rising until the autumn."

The CBI is forecasting that unemployment will peak at 2.8 million during the third quarter of next year. Consumer spending will fall in early 2010 as the VAT rate returns to the full 17.5 per cent, before recovering slowly during the next few quarters.

Mr Cridland said the Government will come under further sustained pressure to offer a clear roadmap of the return to health of the public finances, with international credit rating agencies continuing to monitor UK borrowing levels very closely.

"The economy will be on a fragile path of very slow growth as we continue to feel the lasting effects of the financial crisis," he said. "It remains vital that Government sets out clearer plans to address the fiscal deficit at its next opportunity in order to shore up future economic prospects."

Official borrowing figures released on Friday showed that the deficit rose by £20bn in November alone and is now above £100bn for the 2009/10 fiscal year. But analysts believe Mr Darling is on target to remain within the revised borrowing forecast of £178bn for the whole year that he gave in the PBR.

The Chancellor has pledged to halve borrowing within four years and plans a Fiscal Responsibility Act to enshrine that commitment in law. But there has been scepticism in the City about his ability to deliver such a reduction in borrowing because he has refused to spell out how spending cuts will be applied across different Whitehall departments. And, as the CBI's forecasts re-emphasise today, some economists also see Mr Darling's hopes for the strength of economic recovery as over-optimistic.

Britain faces some significant challenges as it seeks to bounce back from the recession, Ian McCafferty, the CBI's chief economic adviser, warned. "The economy faces a number of structural hurdles over the coming two years and this recovery, like that of the 1980s, will be relatively drawn out," Mr McCafferty said.