UK recovery 'will remain sluggish in 2010'

In its latest economic forecast, the CBI said it expects growth prospects for the economy to be fragile in the near term now that certain stimulus measures, such as the VAT cut and car-scrappage scheme, are ending. Growth in consumer spending will remain subdued this year, as people save more and worries about job security persist.

The economy is expected to grow in the first two quarters of 2010 by 0.3 per cent and then 0.4 per cent respectively and by a slightly faster 0.5 per cent in the next two quarters. As global demand, consumer spending and business investment strengthen through 2011, the pace of growth should then pick up, although gross domestic product (GDP) is still not expected to have returned to pre-recession levels by the end of 2011.

The CBI predicts an annual UK GDP growth of one per cent in 2010, followed by 2.5 per cent in 2011. The Bank of England is forecast to move away from the current emergency rate, with a small rise in interest rates in the third quarter of 2010, which is later than previously expected. Further small incremental increases would take the bank rate up to two per cent by the end of 2011.

‘The economic outlook is improving, but the lack of a clear driver for growth will make for a bumpy ride in the months ahead,’ said Richard Lambert, the CBI’s director-general. ‘The CBI expects the recovery in 2010 to be slow and sluggish, with few signs of real strength until well into next year.

’To convince international investors that the spiralling budget deficit will not derail the economy, the government must set out a credible plan to balance the books by 2015-16 – two years earlier than currently planned.

’It must also avoid damaging tax rises. Targeted spending cuts and the smart re-engineering of public services can preserve front-line services and deliver the savings that will have to be made. At the same time, it is vital that business has the space to grow, invest and create new jobs,’ he added.

Inflation is expected to be slightly higher than previously forecast in the near term but is expected to fall back considerably this year, with CPI inflation dropping below the Bank of England’s two per cent target by the end of 2010 and remaining below target throughout 2011.

Unemployment is expected to continue rising and will peak in the autumn, although the CBI now expects the number of people out of work to be slightly lower than previously thought, at around 2.75 million.

Household spending is not expected to rise strongly this year, as consumers remain worried about job losses, see weak ongoing wage growth and opt to increase savings and cut debts. Household consumption is forecast to increase by just 0.7 per cent in 2010 and by 1.9 per cent in 2011. The household saving rate is expected to be higher than previously thought this year, rising to nine per cent at the end of the year and only easing back at the end of 2011.

The report goes on to say that UK export growth will be supported by the strengthening global economy and the competitiveness of the pound sterling. Exports are expected to grow more strongly than imports next year, with net trade making a positive contribution to output growth.

Business investment, which saw a sharp contraction last year, is expected to fall further in 2010 but recover in 2011 when economic conditions will be somewhat stronger.

Public finances remain problematic and, even though a smaller fall in tax receipts and slightly weaker growth in government spending than expected mean the estimate for net borrowing in 2009-10 has been revised down to £168bn, this still represents 12 per cent of GDP. Net borrowing is expected to reach £177bn in 2010-11, before falling to £149bn in 2011-12.