CBI cuts growth forecast and predicts 'bumpy ride'

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The Confederation of British Industry has warned that Britain's economy faces a "bumpy ride" over the next two years, following the deterioration of the credit markets, rising commodity prices and a prospective rise in inflation.

The CBI has cut its forecast for the growth of the economy for the fourth quarter in a row, lowering estimations by 0.2 per cent to 1.8 per cent.

Ian McCafferty, the CBI's chief economic adviser, said: "The UK economy is being buffeted by some strong headwinds, with the prolonged troubles in the financial markets making for a bumpier ride both this year and next."

The group maintained its disagreement with the more rose-tinted view taken by the Chancellor, Alistair Darling, over the forecast growth for 2009. In his recent Budget speech, Mr Darling predicted GDP growth of between 2.25 per cent and 2.75 per cent. The CBI's estimation comes in at 1.7 per cent.

The biggest downward revision to the CBI's forecast was in consumer spending, saying the outlook had "deteriorated significantly", with purchasing power set to be hit by higher food and energy prices. It predicted that consumption would slow sharply from growth of 3.1 per cent last year to just 1.6 per cent this year.

Mr McCafferty said: "High commodity prices are adding to inflationary pressures and significantly squeezing household incomes. And some households are feeling a chillfrom the credit freeze,with lending conditionsbecoming tighter."

The group pointed out that surging import prices will erode purchasing power in the near-term, while employment growth is not expected to support consumer income as it did in 2007.

In the short term, inflation is predicted to rise as the economy slows. The CBI is backing inflation to peak at 3.2 per cent, on the CPI measure, in the third quarter of this year. This is up from its previous estimation of 2.7 per cent in the previous quarter, following the sharp increases in the cost of petrol, gas, electricity and food, as well as the weakening pound.

Over the longer term, however, inflation is expected to fall as surging commodity prices start to unwind and the economy slows, allowing the Bank of England to cut interest rates. The CBI expects the central bank to make two more cuts this year and one early in 2009 to bring rates down to 4.5 per cent.

The CBI noted that, since its previous forecast note, "the magnitude and severity of financial market problems have become increasingly evident".

Groups have been forced to write down billions of dollars worth of assets in the wake of the credit crunch, while "periodic forced selling of assets has impaired the signals that yields provide, and it is likely that ongoing disorder and dysfunction in particular markets will continue for some time," the CBI said.

Richard Lambert, the CBI's director general, said: "Having enjoyed two years of strong growth, we are now living in uncertain times. We are facing afinancial shock on a scale not experienced in recent times, which is coming on top of already slower growth."