CBI lowers 2011 growth forecast to 2 per cent

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The Independent Online

Government belt-tightening will mean the pace of economic recovery in the UK will be slower next year than previously forecast, the CBI warns today.

The business group has downgraded its gross domestic product (GDP) forecast for 2011 to 2.0 per cent, from 2.5 per cent in its last forecast in June. It said the revision took into account a weaker outlook for consumer spending next year as households will have less disposable income due to ongoing high inflation, resulting from January's VAT rise, and modest wage increases.

The CBI's previous estimates were made before the Chancellor, George Osborne, announced his deficit-busting cuts in the June emergency Budget. But its latest forecast also raised growth forecasts for this year to 1.6 per cent, from 1.3 per cent in June. The revision reflects better-than-expected growth in the second quarter as companies began rebuilding their stocks. The CBI also believes the UK is likely to avoid a double-dip recession.

Richard Lambert, CBI director-general, said: "The degree of uncertainty around the outlook remains high, but our view is that the UK's tentative recovery will be sustained, albeit with weaker levels of growth. The fragile nature of the recovery is why, in the forthcoming spending review, the Government must focus its scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment."

The CBI has forecast consumer spending growth of 0.9 per cent in 2010, followed by 1 per cent in 2011. With VAT increasing to 20 per cent from January, inflation is expected to remain above the Bank of England's 2 per cent target to the end of next year. But the CBI said the Bank was likely to raise interest rates later than expected, forecasting a rise to 1.25 per cent by the end of 2011. Exports are expected to grow by 3.5 per cent in 2010 and 6.4 per cent in 2011.

Unemployment will rise from an expected 2.49 million at the end of this year to 2.62 million at the end of 2011, and public sector net borrowing is forecast to reach £141bn in 2010/11, before falling to £116bn in 2011/12.