Gloomy forecast

The

(CBI) has warned that the financial turmoil and dramatic drop-off in business conditions over the past two months have darkened the economic outlook for 2009.

It now predicts that the recession that started in the third quarter of 2008 will now run for most of 2009 and see unemployment peak at close to 2.9 million.

The UK’s leading business organisation has downgraded its growth predictions for 2008 and 2009, following the severe impact on confidence and business activity from the financial turmoil in October.

GDP growth for 2008 has been revised down from 1.1 per cent to 0.8 per cent, and in 2009 the CBI now expects the economy to contract by 1.7 per cent, against its forecast in September of 0.3 per cent growth.

The economy is expected to shrink quarter-on-quarter by 0.8 per cent between October and December this year, and to contract again for a subsequent three quarters before beginning a slow recovery through 2010.

As the economy slows sharply over the coming year and commodity prices continue to ease, consumer price index (CPI) inflation is expected to fall from 4.2 per cent this quarter to 1.7 per cent by the end of 2009, undershooting the Bank of England’s two per cent target. Into 2010, inflation is likely to fall back further to a low of 1.1 per cent, averaging just 1.2 per cent over the year.

The CBI claims that the drop in inflationary pressure will give further room to the bank to make a series of rate cuts over the coming six months to bring the base rate to possibly as low as 1.5 per cent.

It also estimates that public borrowing will increase sharply during the recession. Net borrowing for 2008/09 is expected to hit £69.9bn and £93.8bn in 2009/10, which represents 4.8 per cent and 6.4 per cent of GDP respectively.