25th March 2008
The CBI has downgraded its 2008 outlook
for UK growth, and it forecasts even slower growth in 2009
due to continued troubles in the credit markets, rising commodity
prices and weak domestic and global demand.
In its latest
quarterly economic forecast published today, the UK's business
group has lowered its figure for
this year’s rate of GDP growth down 0.2% to 1.8%. The
forecast for next year has also been downgraded and the CBI’s
figure of 1.7% GDP growth for 2009 contrasts with the chancellor’s
more optimistic forecast in the recent Budget of between
2.25% to 2.75%.
At the same time as the economy slows,
inflation is due to rise. The CBI expects that the CPI rate
of inflation
will
peak at 3.2% in Q3 of 2008, forcing the governor of the Bank
of England to write a second letter to the chancellor. This
compares with 2.7% predicted in the previous forecast.
Due
to the slowing economy, however, inflation is expected to
come down in the longer term. So, the CBI expects the
Bank of England will be able to cut interest rates in the
second and fourth quarters of this year, with one more reduction
early next year. This would bring interest rates down to
4.5% by early 2009.
Richard Lambert, the CBI’s director-general said: “Having
enjoyed two years of strong growth, we are now living in
uncertain times. We are facing a financial shock on a scale
not experienced in recent times, which is coming on top of
already slower growth.
"Outside the financial and property
sectors the overall mood of business is, however, nothing
like as gloomy as you might
guess from reading today's headlines. While there are signs
of a high street slowdown and some firms say it's getting
harder to raise bank finance, around the country many still
report quite positive conditions.
"So it is vitally important
to keep the story in perspective. Although painful, write-offs
by British banks represent a
tiny fraction of their capital. After a few good years, the
UK corporate balance sheet is in good shape. Our flexible
labour market is a real force for stability and our best
bet is still that our economy will continue to show modest
growth this year and next, before starting a gradual recovery."
The
biggest downward revision in the CBI's forecast has been
to household spending, as purchasing power is heavily squeezed
by higher food and energy prices. Consumption is forecast
to slow more sharply than previously thought, from growth
of 3.1% last year to just 1.6% this year - down 0.3% on the
previous forecast in December.
While the weakness of the pound
will make the cost of imported goods and services more expensive,
the depreciation of sterling
will help exports. The CBI’s forecast for net trade
has improved for 2008 and 2009, with exports growing by 3.8%
this year and 5.5% in the next, compared with imports growing
at just 2.2% and 3.3% respectively. Investment is forecast
to slow this year – growing by 1.4% compared with 5.0%
in 2007. A modest fall in property expenditure contrasts
with continued growth in government spending and business
investment.
Ian McCafferty, the CBI’s Chief Economic
Adviser said: "The
UK economy is being buffeted by some strong headwinds, with
the prolonged troubles in the financial markets making for
a bumpier ride both this year and next. High commodity prices
are adding to inflationary pressures and significantly squeezing
household incomes. And some households are feeling a chill
from the credit freeze, with lending conditions becoming
tighter.
"That said a slower economy will bring
inflation down in the medium-term, so the Bank should be
able to cut
interest rates
twice in 2008 and again early in 2009. Also on a brighter
note, UK exports are being helped by a weaker pound, as the
latest CBI manufacturing figures have confirmed."
Other
key points of the economic forecast and report include:
