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:
