CBI predicts sluggish growth in 2011 as consumer spending falls

BUSINESS body the Confederation of British Industry forecasts the economy growing at a "very sluggish" rate of only 0.2 per cent in the first three months of 2011, as the higher sales tax dampens spending. The CBI marginally upped its forecast for growth in 2012 but maintained its prediction for next year. It continues to forecast two per cent growth in the UK economy in 2011, rising to 2.4 per cent in 2012.

It said despite many risks to the outlook, the UK recovery is expected to be maintained and it still considers the risk of a fall back into recession to be low.

CBI chief economic adviser Ian McCafferty said: "The pace of recovery in the UK economy has been slightly stronger over the past year than we and many others had expected, and somewhat faster than typical during the first year out of a recession. But we do not expect that rapid pace of growth to continue over the next two years of recovery.

"The big early kicker to growth from the turn in the inventory cycle has already passed and we are now starting to feel the impact of lower government spending.

"As a result, quarterly growth at the start of 2011 is likely to be very sluggish, although we do expect the recovery itself to stay on track."

The CBI said the pace of recovery is expected to slow early next year when consumer spending falls slightly in response to VAT rising from 17.5 per cent to 20 per cent. It expects steady but modest growth of 0.4 per cent, 0.5 per cent and 0.5 per cent over the remaining quarters of 2011.

Quarterly growth rates are expected to pick up a bit more momentum during 2012, but 2.4 per cent growth is "rather subdued" at this stage of a recovery.

The CBI expects inflation throughout 2011 to be higher than previously forecast, as energy and commodity prices rise.

"What is striking is how little we see growth accelerating in 2012," added Mr McCafferty. "Typically, by the third year of a recovery, growth would be more robust than we expect for either 2011 or 2012.

"Growth prospects for consumer spending look pretty subdued over the next couple of years. Real take-home pay will be hit further next year, unemployment is not expected to fall very quickly in 2012, and households will most likely face higher mortgage interest rates.

"The persistent strength of energy and commodity prices is a growing concern, as it is likely to mean that inflation does not fall back quite as sharply as many hope.

"This makes it more likely that the Bank of England will need to start pulling back from record low interest rates earlier, rather than later, next year."

The CBI added unemployment is forecast to edge higher over the course of 2011, with a peak close to 2.6m by the end of the year.