Recession has hit the bottom, but no upturn until spring 2010

GDP will contract by 3.9 per cent this year but the end is in sight, says CBI
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The Independent Online

The CBI will today join the growing list of economists and business groups arguing that the UK recession is now bottoming out.

But despite the relative optimism, Britain's biggest employers' organisation says it has seen little evidence of green shoots of recovery in recent weeks, and warns that official statistics on the performance of the UK economy during the first three months of the year are expected to reveal that the downturn has been even more severe than expected.

The CBI has also substantially downgraded its forecasts for 2009 and is now predicting that the economy will shrink by 3.9 per cent this year. It had previously expected the figure to come in at 3.3 per cent. The group is also forecasting a much longer-lasting recession than other analysts, including the Government.

Nevertheless, the Chancellor, putting the final touches to the Budget he is set to announce on Wednesday, will welcome a more upbeat tone from the CBI, which is now expecting the first quarter of this year to be the most difficult of the downturn, with figures improving during the rest of the year.

"In these turbulent times it is difficult to build a clear picture of how the economy will perform, but there are a few tentative signs that the steepest phase of the recession is now behind us, and that the banking packages, aggressive monetary policy and fiscal support will steady the pace of decline from here on," said Richard Lambert, the director general of the CBI. "The recession is by no means over, but we see a return to very weak growth by spring 2010."

However, Mr Lambert said that while policy initiatives are beginning to have an improving effect on the economy, the CBI does not believe the public finances are in a sufficiently healthy state for Alistair Darling to unveil further fiscal boosts this week. "Given falling tax revenues, the shrinking economy, and alarming levels of government debt, we urge the Chancellor to avoid any further major fiscal boosts in the Budget," Mr Lambert said.

"Budget measures should be targeted on jobs and investment, with a focus on efficiency savings and public service reform."

With that background, the CBI's forecast is now for the economy to shrink by a total of 5.1 per cent during the course of the recession, which would mean the UK suffering only marginally less than in the downturn of the early 1980s, when GDP contracted by 5.9 per cent.

The group expects negative GDP figures in each quarter this year, which would mean six consecutive quarterly falls in the size of the economy, with growth not returning until the second quarter of 2010. Even then, the CBI expects the recovery to be very weak, and is now forecasting 0.1 per cent growth in the economy across 2010.

While the Chancellor is expected to revise downwards his own economic forecasts on Wednesday, the CBI's vision of the next 12 months is likely to prove much gloomier than the figures Mr Darling will lay out. The business group's projections for the public finances are also more downbeat.

The mixed analysis from the CBI is echoed by the Ernst & Young ITEM Club Spring forecast also being published today. The group is predicting GDP contraction of 3.5 per cent this year, and another 0.1 per cent in 2010. But it, too, warns of pain to come.

Peter Spencer, the chief economic adviser to the group, said: "Although one or two positive signs have started to appear, we face another 12 to 18 months of serious grief. Around 900,000 jobs will be lost this year and half a million next."

Job security fears will push consumer spending down by 3.1 per cent this year and 0.7 per cent next. With house prices now around 3 per cent lower than the fundamentals justify – compared with a 15 per cent bubble early last year – the group is predicting a 16.4 per cent fall over 2009 as a whole, and another 5 per cent drop in prices in 2010.