UK set for low growth as the mood 'darkens'

The Confederation of British Industry (CBI) warns today that there is a "darkening mood" among British business people as they face up to years of lacklustre, disappointing and fragile economic growth.

The squeeze on household incomes and consumer spending has hit UK business confidence hard in recent weeks, as has talk about the Government's planned spending cuts and sovereign debt crises in the eurozone and in the US.

Businesses remain nervous about spending an estimated £60bn cash pile on investment plans, instead waiting to see whether the current raft of economic and political risks pass and remaining cautious in the meantime.

Only exports were really identified by the CBI as a potentially strong source of growth – up 7.7 per cent this year and set for a rise of 6.9 per cent in 2012.

In its latest economic forecasts, the CBI has cut its figure for this year from growth of 1.7 per cent to 1.3 per cent – the current consensus among independent economists. The Office for Budget Responsibility's prediction remains at 1.7 per cent.

The CBI expects some "bounce back" from the second quarter's disappointing growth rate of 0.2 per cent, so that growth in the autumn will edge up to 0.8 per cent before slipping back in the winter to 0.5 per cent.

It says unemployment will peak at 2.5 million next year, while inflation will go above 5 per cent this autumn and remain above the official 2 per cent target until the end of next year.

But despite the economic slowdown, the CBI says that the Government should not abandon its plans to cut the Budget deficit – and nor should the Bank of England opt for a new round of quantitative easing when it announces its latest moves on monetary policy this Thursday.

The CBI's chief economist, Ian McCafferty, said "QE2" would "spook the markets" and push interest rates up. John Cridland, the director-general of the CBI, said he had detected "an erosion in confidence". He said that "the mood has darkened significantly in recent weeks" in his meetings with member firms.

He stressed that it was too early to tell if the present economic slowdown was merely a "soft patch" or "something more substantive".

If it did turn out to be more serious in the third quarter of the year, he said that the Government would then need to come up with "further measures" to boost growth, while still sticking to the fiscal consolidation plan.

"The economic outlook has become even more challenging but we still expect the economy to continue to grow modestly this year and next. The global economy has slowed in the face of several shocks including the Japanese tsunami and soaring commodity prices," Mr Cridland said.

"These factors have combined with political uncertainties around the eurozone sovereign debt crisis, the wrangling in Congress over the debt ceiling and the policy tightening in China to erode confidence and soften activity," he added.

He identified problems in the eurozone as the main danger for the UK, and where an "eagle eye" would need to be focussed on developing crises.

Echoing the CBI survey, the latest Lloyds Bank Corporate Markets Business Barometer reveals UK business confidence falling back in July after hitting a 13-month high in June.

Trevor Williams, the chief economist at Lloyds Bank Corporate Markets, said: "Confidence took a knock this month, most likely because of the concern that the sovereign debt crisis in our largest trading partner, the eurozone, was spreading to countries such as Italy and Spain."