CBI predicts 'shallow recession' and 2m jobless

The Confederation of British Industry has become the latest in a growing chorus of voices declaring Britain to be in, or close to, recession.

In its latest forecast, the employers' organisation says that growth in 2009 will be "feeble", unemployment will hit the 2 million mark, and the economy will go into a "shallow recession".

Output, says the CBI, will shrink by 0.2 per cent during the third quarter and by 0.1 per cent in the final three months of this year. The group also predicts an overall growth rate for 2008 of 1 per cent and for 2009 of 0.3 per cent, both sharp downgrades.

The director-general of the CBI, Richard Lambert, said: "Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove shortlived."

Taking some comfort from the state of the UK's flexible labour market, however, Mr Lambert added: "This is not a return to the 1990s when job cuts and a slump in demand were far more prolonged. The squeeze on household incomes and company profit margins from higher costs will begin to ease as the price of oil moves downwards and, although the credit crunch will be with us for some time, conditions are set to improve later in 2009."

The CBI's economists say that the Bank of England should have scope to cut interest rates after inflation peaks this autumn, at around 5 per cent, and is clearly on a downward path. The CBI envisages a bold cut of 0.5 percentage points in November, followed by two quarter percentage point cuts in "early 2009", which would leave Bank Rate at 4 per cent.

Ian McCafferty, the CBI's chief economic adviser, explained that "the Bank of England's hands have been tied in recent months by the relentless rise in inflation. But with oil process heading lower, very weak economic activity for a good number of quarters and little evidence of wage pressure, interest rate cuts will soon be justified, and will provide welcome relief to households and businesses".

House prices, on the official measure, will fall by "10 to 15 per cent" from their peak level last autumn, the CBI said, adding the property market will endure a period of "prolonged weakness".

The CBI's predictions join a growing consensus predicting a UK recession. The Bank of England last month foresaw "broadly flat" economic activity over the next 12 months, acknowledging the possibility of some quarters of contraction.

The OECD and the European Commission have also said that the British economy will experience a small loss of output.

The export sector is one of the few areas where the CBI sees some cause for immediate optimism, aided by the sharp depreciation of the pound, down 5 per cent in the past month and 16 per cent over the last 12 months.

Net trade is thus set to make a positive contribution to the economy, but "the domestic economy is at the centre of the downturn. In common with other observers, the CBI identifies the housing, retail and financial sectors as being under particular pressure.

Meanwhile, confidence among British businesses is faltering in the face of continued uncertainty and remains close to an all-time low, said Lloyds TSB.