New kind of cycle in economy confronts business

Ian McCafferty, the chief economic adviser to the CBI, said financially-driven recessions tend to be deeper and longer than other downturns and leave a "lingering impairment" in the financial system.

The long-term legacies will be scarce and expensive credit, government debt reduction programmes that could impact on the wider economy and the threat of rising inflation, he told the business event in Leeds.

Mr McCafferty warned that the global recovery will be "desynchronised", with emerging markets racing ahead of OECD economies such as the United States and Britain.

He also questioned whether coordinated fiscal tightening planned for 2011 would happen before the private sector recovery has gained enough momentum to sustain heavy cuts in public spending.

Mr McCafferty predicted that the UK will face a "relatively modest, stroke sluggish recovery in 2010 and into 2011".

He said exports are improving, which will help stimulate GDP growth, but it is unclear where domestic demand will come from.

He added that the forthcoming cuts in public spending will remove another growth stimulus.

Mr McCafferty added: "It's clear from my conversations with business across the UK that investment spending is unlikely to pick up rapidly in the near future.

"We have a great deal of slack in the economy. There is not much appetite to invest in plants and machinery."

Consumer spending is seeing a modest, rather than rapid, recovery, he said, and while unemployment has not risen as highly as feared, wage levels have remained low, which has limited disposable income.

Mr McCafferty said he was concerned that political uncertainty is clouding the scale of spending cuts, which runs the risk of causing turmoil in the financial markets, although this has so far been avoided.

He is also worried about global commodity prices pushing up inflation, which could lead the Bank of England to raise interest rates at a time of fiscal tightening.

Mr McCafferty said: "We have come to the end of what Governor Mervyn King called the Nice decade.

"Between 1995 and the start of the financial crisis was a period of astoundingly benign economic conditions in the UK and across the world.

"We are moving back into a cycle where there will be much more volatility and much more uncertainty, more like the cycles we used to suffer from before the mid-1990s.

"That makes business planning that much more difficult. The message we are giving those considering corporate plans and strategies is that even though the recession might be over, it is not in any sense a return to business as normal.

"We are moving into a very different set of issues and businesses will have to learn to adapt and prosper."

The CBI lunch was sponsored by HML, the Skipton-based financial outsourcing company.

Neil Warman, the chief commercial and financial officer, told the audience: "The landscape for all our businesses has changed."

But with challenging economic conditions come opportunities, he said.

But here's the good news...

Despite the challenges ahead, Ian McCafferty of the CBI said the global economy has made great strides in the last year.

"To reflect now, as we come into the spring of 2010, that we have some significant improvements in recent economic news, I think it is quite remarkable in terms of where we could have been when you think of the dark days only 12 months ago," he said.

"We have very strong growth starting to emerge from China. In the US we have had a strong fourth quarter. We had some encouraging growth in the core markets of the Eurozone, albeit there are still some big problems in the peripheral areas.

"Here in the UK, we have seen a stabilisation of business and consumer confidence. The housing market has stabilised. We have had two consecutive quarters of positive GDP growth."