Growth will be slower than we hoped, says CBI

The confederation of British Industry today became the latest body to cut its economic growth forecasts for Britain, warning that it now expected the recovery to be slower than previously anticipated in both 2011 and 2012.

The employers' organisation said that while there were some reasons to be optimistic, the difficulties facing the economy, particularly the problems that would hinder the consumer sector, were so serious that the recovery would be far less robust than this stage of the cycle following most recessions.

It now expects the economy to grow by 1.7 per cent this year and by 2.2 per cent in 2012, compared to its previous forecasts of 1.8 per cent and 2.3 per cent respectively. The reductions are small and the CBI remains broadly supportive of the Government's deficit cutting plans. However, the fact that it has felt it necessary to cut its forecasts will provide further ammunition to critics of government policy who believe the Chancellor, George Osborne, is jeopardising the recovery by seeking to cut the deficit so quickly.

The CBI said it expected exporters to continue to lead the recovery, forecasting export growth of 8.6 per cent this year and 7.6 per cent next, comfortably ahead of import growth. The organisation, which represents larger businesses, said it also expected business investment to be a big driver of the economy, predicting growth of almost 9 per cent in both 2011 and 2012.

"The economy is battling headwinds of squeezed household budgets, weak wage growth, high inflation, and necessary public spending cuts – concerns also remain over the volatility of oil prices, and the impact of the earthquake in Japan on UK supply chains," said the CBI director-general John Cridland, adding that while there were bright spots, "the rebalancing of the economy is going to take time to feed through, and domestically it may not feel like much of a recovery for some time yet."

Inflation will continue to be higher for all of this year and into 2012, the CBI forecast, warning that higher commodity prices would continue to bite. However, it said it expected the Bank of England's view that inflation would begin to ease by the middle of the year to be proved correct.

The CBI expects interest rates will start to rise during the third quarter of this year, slightly earlier than the consensus view in the markets, which is for the first base rate rise in November, with a number of increases to follow. Base rates should have risen to 2.5 per cent by the fourth quarter of 2012, it said. It believes unemployment will peak in the final months of this year at about 2.6 million – and there will be only modest falls in 2012, with the number of people out of work still likely to be about 2.5 million at the end of 2012.

The CBI predicts household spending will rise by just 0.2 per cent in 2011 and by 1.1 per cent in 2012, as consumers' finances remain constrained by higher inflation and VAT, small pay increases, rising mortgage interest rates and fears about unemployment.