Industry | 2009.12.20
UK to emerge from slump by end of year
• CBI analysis shows workers will face pay freezes next year
• Bank of England interest rates to hit 2% by the end of 2010
Prime minster Gordon Brown was given a helping hand today ahead of the forthcoming general election as a leading business organisation said that Britain\'s battered economy would finally exit recession by the end of the year. However, it cautioned that recovery would remain "sluggish" for at least two years.
In its latest snapshot of the UK economy, the Confederation of British Industry (CBI) said that gross domestic product (GDP) would grow by 0.5% in the final quarter of 2009 as consumers rush to the shops before VAT returns to 17.5%, from 15% at the turn of the year.
The economy has been mired in recession for six consecutive quarters - the longest slump in history – but the CBI now expects output to grow by 1.2% in 2010 and by 2.5% in 2011. Its growth forecasts are less optimistic than those of chancellor Alistair Darling. In the pre-budget report, the chancellor forecast growth of 1.25% in 2010 and 3.5% the following year.
The CBI warned that despite two years of economic expansion, UK GDP will still not have returned to its pre-recession level by the end of 2011, highlighting the depth of the recession and the weakness of the economic recovery.
Ian McCafferty, CBI chief economic adviser, said: "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."
Some analysts still think there is a chance that the UK may have exited recession in the third quarter of the year. The Office for National Statistics (ONS) will publish its second revision for GDP in the third quarter tomorrow. It was originally judged to be contracting by 0.4%, but later revised to shrinking by 0.3%. Now some economists have predicted that GDP could be revised to show growth of 0.1%.
Despite the economy returning to growth, the CBI warned workers that they should be braced for another round of job cuts and pay freezes.
"Unemployment is likely come down sluggishly however, after peaking slightly lower than previously forecast, at just over 2. 8m in the autumn next year," it said.
"In the spring many staff will face another cycle of wage freezes, and job losses will continue rising until the autumn."
However, after very constrained wage growth during 2009 and 2010, average earnings are expected to rise somewhat faster in 2011, at 3.9%.
The public finances will remain in very poor health for some time, according to the CBI, with net borrowing of £180.8bn in 2009/10 rising to £184.1bn in 2010/11, before falling to £154bn in 2011/12.
John Cridland, CBI deputy director-general, said: "The economy will be on a fragile path of very slow growth, as we continue to feel the lasting effects of the financial crisis. And 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."
The planned VAT rise in January will push CPI inflation up sharply before it eases back during 2010 and falls below the Bank of England\'s 2% target throughout 2011. Oil prices are expected to rise continually over the coming two years, as the global economy recovers with a relatively limited oil supply, hitting almost $100 per barrel at the end of 2011.
The UK Bank rate is forecast to start rising in spring 2010, as the Bank of England withdraws some of the monetary stimulus in order to minimise the risk of undesirable inflationary pressure in the medium term. The Bank rate is expected to reach 2% by the end of next year, with no further rises in 2011, to sustain the recovery as fiscal policy begins to tighten.
For more information, please visit
http://www.guardian.co.uk/business/2009/dec/21/cbi-economic-growth-recession
