Stabilising economy

The UK economy is stabilising, with the worst of the quarterly falls in GDP behind us, but it will take until the beginning of next year before we see a return to growth, the CBI has said.

The UK’s leading business group expects modest growth to resume during the first three months of 2010, with the pace of growth gradually picking up during next year.

The CBI predicts that UK GDP, supported by low interest rates and quantitative easing, should flatten out during the second half of 2009, with quarter-on-quarter figures of -0.1 per cent and 0 per cent in quarter three and quarter four, and modest quarter-on-quarter growth of 0.1 per cent and 0.3 per cent in quarter one and quarter two of 2010.

Richard Lambert, CBI director-general said: 'The world recession has deepened, so it is not surprising that the UK economy has continued to suffer. However, the harshest period of the recession looks to be behind us, the economy is stabilising and this should continue during the second half of this year.

'The return to growth is likely to be a slow and gradual one; difficult credit conditions are still affecting business behaviour. For positive growth to return, lenders need to feel more confident so that credit can start flowing again.'

The CBI expects that, by the end of the recession, the economy will have shrunk by a cumulative 4.8 per cent – not as severe as the 5.9 per cent seen in the early 1980s – after five consecutive quarters of falling GDP.

The CBI expects there to be very slight growth from the start of 2010, with the pace picking up slowly, such that trend growth rates are restored only by the end of the year. For 2010 as a whole, this profile yields an average annual GDP growth of a modest 0.7 per cent. This follows a fall this year in GDP of 3.9 per cent.

CPI inflation is expected to fall below the Bank of England's target of two per cent in quarter three 2009 and remain there throughout the forecast period to the end of 2010.

Quantitative easing is expected to continue for some months yet, but by the spring of next year, the Bank is expected to wish to return monetary policy gradually towards a more normal footing, with very modest increases in the official rate of interest from its current 0.5 per cent.

Significantly, the labour market is proving to be even more flexible than hoped, with many more private-sector employees accepting wage freezes and short-time working than in previous downturns. This should help limit the pace of job losses through 2009, and the CBI now expects unemployment to peak at a slightly lower level than previously thought.

Unemployment is still expected to continue to rise until quarter two 2010, to a peak of 3.03 million (9.6 per cent), before edging lower during the remainder of 2010.

Whereas firms have reduced their stock at a rapid pace at the start of this year, this should now begin to ease and firms should start rebuilding their stocks next year.

The public finances are expected to be under growing pressure from the recession and net borrowing is expected to reach £172.3bn in 2009-2010 and £182.2bn in 2010-2011, representing 12.2 per cent and 12.6 per cent of GDP respectively.