Osborne under pressure to cut growth forecasts

The Confederation of British Industry today becomes the latest organisation to downgrade its growth forecast for the British economy, threatening the credibility of the Chancellor's predictions, the Government's prospects of reducing the fiscal deficit and higher unemployment as the economy struggles to rebalance.

Yet, even as output and activity weakens, inflation is set to spike even higher – 4.2 per cent in the coming weeks – which will add to pressure on the Bank of England to raise interest rates this week.

Having forecast growth in the national income of 2 per cent in 2011 as recently as last December, the CBI now says that it will be down to 1.8 per cent. It also trimmed its forecast for growth in 2012, from 2.4per cent to 2.3 per cent. The National Institute for Economic and Social Research also cut back its projections for the economy recently, suggesting that 2011 would see a mere 1.5 per cent expansion.

As things now stand the Office for Budget Responsibility's forecasts for growth in the UK over 2010, adopted by the Chancellor, have already been missed, due only partly to the poor weather, and the forecasts of 2.1 per cent and 2.6 per cent growth in 2011 and 2012 look increasingly vulnerable. The shadow Chancellor, Ed Balls, yesterday taunted the Chancellor that his first growth forecasts will have to be trimmed back in the Budget on 23 March.

John Cridland, the CBI's director general, said: "The early estimate for GDP growth in the final quarter of last year came as a surprise, suggesting that underlying growth may have been weaker than previously thought.

"We do expect growth in 2011, albeit rather anaemic and sluggish, which will accelerate during 2012. With household spending under some considerable strain, we will be looking to business investment and exports to help deliver economic growth over the coming two years.

"While this growth will still be lower than the long-term average and unemployment will continue to creep up, job numbers will also increase as the recovery picks up."

After the disruption caused by snow, and despite the rise in VAT to 20 per cent, the CBI says the "bounce back" is expected to help quarter-on-quarter growth edge up to 0.6 per cent in the first three months of 2011. Its forecast for the remainder of 2011 is broadly unchanged, with "steady but modest" growth of 0.5 per cent expected over each of the next three quarters.

According to the Office for National Statistics, the poor weather left 2010 growth at 1.4 per cent, against an official OBR forecast of 1.8 per cent. The OBR's forecast for 2011 is also out of kilter with independent opinion, at 2.1 per cent against 2 per cent more generally. It suggests that the budget deficit in 2011-12 may be somewhat larger than the Chancellor or the OBR have so far indicated, which will add to pressure on George Osborne to change course and implement a so-called "Plan B".

"Stubborn" unemployment, says the CBI, will peak at 2.7 million in the last months of this year. With "relatively restrained" growth in wages households will be "cautious in their spending patterns".

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