The UK's economic recovery will be unsteady and slow, with growth unlikely to return to pre-recession levels before 2012, a business group said today.
The Confederation of British Industry (CBI) said that while it expects the UK economy to come out of recession in the fourth quarter of 2009, growth would remain “subdued” next year.
In its latest economic forecast, the CBI predicted GDP growth of 0.5% this quarter, boosted by pre-Christmas consumer spending before the VAT rate returns to 17.5% on January 1 2010.
Growth of 0.3% is expected to follow in the first two quarters of 2010, after which an expansion rate of 0.5%-0.7% will be sustained until the end of 2011, as household spending recovers and businessess start to rebuild stocks. In total, the CBI predicts GDP growth of 1.2% in 2010, increasing to 2.5% in 2011.
John Cridland, CBI deputy director general, commented: “The outlook is brightening as the global economy finds its feet, although we will need to keep our nerve during early 2010, and there is no sign of a clear driver of strong economic growth.”
He added that while growth would gradually pick up in the second half of 2010 and increasing confidence and demand would lead the UK into a more positive 2011, the economy will be on "a fragile path of very slow growth", as the UK continues to feel the lasting effects of the financial crisis.
Following Alistair Darling’s revision of the public deficit from £175bn to £178bn in this month’s Pre-Budget Report, the CBI expects net borrowing to be £180.8bn this year, rising to £184.1bn in 2010/11 before falling to £154bn in 2011/12.
“It remains vital that government sets out clearer plans to address the fiscal deficit at its next opportunity in order to help shore up future UK economic prospects,” added Cridland.
Unemployment will peak at just over 2.8 million in the third quarter of 2010, while household spending will fall slightly (by 0.2%) in the first few months of next year in response to the VAT rate returning to 17.5%, but should then grow slowly and steadily, the CBI said.
Ian McCafferty, CBI chief economic adviser, added: “The UK economy faces a number of structural hurdles over the coming two years, and this recovery – like that of the 1980s – will be relatively drawn out.
“Credit conditions will remain difficult as the banks slowly nurse themselves back to health, consumer spending will be shaped by the need to rebuild savings, and the public sector will soon have to tighten its belt. All three factors will act as headwinds to growth.”
However, the strengthening global economy and relative weakness of sterling should boost UK exports by 1.9% in 2010 and 5.3% in 2011, the CBI said. Business investment should also begin to recover early next year, after falling significantly throughout 2009, but will continue to be hindered by weak demand and credit shortages.
The interest rate, which has remained at an all-time low of 0.5% since March 2009, should start rising in spring 2010, and is expected to hit 2% by the end of next year, the business group said.
© Crimson Business Ltd. 2009