Economic recovery fragile until 2011, warns CBI

The UK's economic recovery will not pick up pace until the middle of next year, a business group warned today.

The CBI said economic growth would remain fragile in the near-term due to the end of stimulus measures, such as the reduction in VAT and the car scrappage scheme.

It said consumer spending would also remain subdued this year as people saved more and worried about job security.

The group is predicting economic growth of 0.3% and 0.4% in the first two quarters of 2010, followed by growth of 0.5% during the second half of the year.

It said the pace of growth should then pick up in 2011, as global demand, consumer spending and business investment strengthened.

But it added that it still did not expect GDP to have returned to pre-recession levels by the end of 2011.

Overall, the CBI is predicting annual economic growth of 1% in 2010, rising to 2.5% in 2011.

It expects the Bank of England to begin raising interest rates in the third quarter of this year, with the base rate ending 2011 at 2%.

Unemployment is expected to continue rising to peak in the autumn at 2.75 million, slightly lower than the CBI had previously forecast.

Household consumption is forecast to increase by just 0.7% in 2010 and by 1.9% in 2011.

At the same time, the household savings rate is expected to be higher than previously throughout this year, rising to 9% in December, and only easing back at the end of 2011.

Richard Lambert, CBI director-general, said: "The economic outlook is improving, but the lack of a clear driver for growth will make for a bumpy ride in the months ahead.

"The CBI expects the recovery in 2010 to be slow and sluggish, with few signs of real strength until well into next year.

"To convince international investors that the spiralling budget deficit will not derail the economy, the Government must set out a credible plan to balance the books by 2015/16, two years earlier than currently planned."

He added that it must also avoid damaging tax rises, saying targeted spending cuts and "smart re-engineering" of public services could deliver the savings which will have to be made.

The CBI said it expected public finances to remain in "very poor health" going forward.

It said a smaller fall in tax receipts and slightly weaker growth in government spending than expected, meant the estimate for net borrowing in 2009/10 had been revised down to £168 billion, but this still represents 12% of GDP.

Net borrowing is expected to reach £177 billion in 2010/11, before falling to £149 billion in 2011/12.