CBI predicts 1.6 per cent growth in UK economy

In its latest economic forecast, the CBI predicts that the UK economy will grow by 1.6 per cent in 2010 − up from 1.3 per cent in its June forecast. The upward revision is said to reflect better-than-expected growth in the second quarter this year as companies rebuild their stocks.

In a statement, the CBI has revised down its GDP forecast for 2011 to two per cent from 2.5 per cent in June. This takes into account the additional fiscal consolidation measures announced in the emergency budget, which took place after the CBI’s June forecast.

Looking at quarter-on-quarter growth, the CBI expects the economy to grow by 0.3 per cent and 0.6 per cent in the latter two quarters of 2010, having achieved 0.3 per cent and 1.2 per cent growth in the first half of the year.

Quarterly growth is then forecast to pick up from 0.3 per cent to 0.6 per cent over the course of 2011.

Although the level of uncertainty around the forecast remains high, the CBI considers that a double dip back into recession is unlikely.

Richard Lambert, CBI director-general, said: ‘Our view is that the UK’s tentative recovery will be sustained, albeit with weaker levels of growth.

‘The fragile nature of the recovery is why, in the forthcoming spending review, the government must focus its scarce resources on those areas that most galvanise growth − namely infrastructure and capital investment.’

Although household spending is expected to receive a boost at the end of the year, as consumers seek to avoid higher VAT in January, growth in spending is forecast to be restrained next year. Consumer spending growth of 0.9 per cent in 2010 is likely to be followed by a one per cent rise in 2011.

Having stabilised this year, following record falls in 2009, the recovery in business investment is predicted to be subdued, with only moderate growth next year.

With VAT increasing to 20 per cent from January, inflation is expected to remain above the Bank of England’s two per cent target through to the end of 2011.

Banks are likely to start raising interest rates later than previously expected − from next spring. Monetary stimulus will gradually be withdrawn and rates are forecast to reach 1.25 per cent by the end of 2011.

UK exports are expected to grow by 3.5 per cent in 2010 and 6.4 per cent in 2011, with net trade expected to make a positive contribution to GDP growth rates throughout the forecast period.

Unemployment is no longer expected to peak during the forecast period, but will rise at a more gradual rate − moving from an expected 2.49 million at the end of this year to 2.62 million at the end of 2011.

Public-sector net borrowing is forecast to reach £141bn in 2010/11 before falling to £116bn in 2011/12 − representing 9.5 per cent and 7.6 per cent of GDP, respectively.