Belfast Telegraph

CBI cuts growth forecast as pace of recovery set to slow

Government belt tightening will mean the pace of economic recovery in the UK will be slower next year than previously forecast, the Confederation of British Industry has warned.

The business group downgraded its GDP forecast for 2011 to 2%, from 2.5% in its last forecast in June.

It said the revision took into account a weaker outlook for consumer spending next year as households will have less disposable income due to ongoing high inflation, resulting from January's VAT rise, and modest wage increases.

The CBI's previous estimates were made before Chancellor George Osborne announced his deficit-busting cuts in the June emergency Budget.

But the group's latest forecast was not all doom and gloom, with growth forecasts for this year revised upwards to 1.6% in 2010, from 1.3% in June.

The slight upward revision reflects better than expected growth in the second quarter of this year as companies began rebuilding their stocks, the CBI said.

It also believes the UK is likely to avoid slipping into a double-dip recession.

Richard Lambert, CBI director-general, said: "The fragile nature of the recovery is why, in the forthcoming spending review, the Government must focus its scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment."

The CBI has forecast consumer spending growth of 0.9% in 2010, followed by 1% in 2011.

With VAT increasing to 20% from January, inflation is expected to remain above the Bank of England's 2% target through to the end of next year. But the CBI said the Bank was likely to start increasing interest rates later than previously expected, forecasting a rise to 1.25% by the end of 2011.

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

Unemployment will rise from an expected 2.49 million at the end of this year to 2.62 million at the end of 2011 and public sector net borrowing is forecast to reach £141bn in 2010/11, before falling to £116bn in 2011/12.