'Slow recovery' as people save and worry over jobs

In its latest economic forecast, the CBI said it expects growth prospects for the economy to be "fragile" in the short-term with economic boosts such as the VAT cut and car scrappage scheme ending. It believes growth in consumer spending will remain subdued this year, as people save more and worry about jobs.

CBI regional director for Yorkshire and the Humber Andrew Palmer said: "The economic outlook is improving, but the lack of a clear driver for growth will make for a bumpy ride in the months ahead.

"The CBI expects the recovery in 2010 to be slow and sluggish, with few signs of real strength until well into next year."

The organisation also called for a "credible plan" to persuade investors that Britain's economy is worth investing in.

Mr Palmer said: "To convince international investors that the spiralling budget deficit will not derail the economy, the Government must set out a credible plan to balance the books by 2015-16, two years earlier than currently planned. It must also avoid damaging tax rises. Targeted spending cuts and smart re-engineering of public services can preserve front line services and deliver the savings that will have to be made.

"At the same time, it is vital that business has the space to grow, invest and create new jobs. That's the only way out of our current fiscal mess."

The CBI expects the economy to grow in the first two quarters of 2010, by 0.3 per cent and then 0.4 per cent, respectively, and by a slightly faster 0.5 per cent in the next two quarters. It believes pace of growth should then pick up through 2011, although does not expect GDP to return to pre-recession levels by the end of 2011.

It also expects a small rise in interest rates in the third quarter of 2010, with "further small incremental increases" taking the Bank of England rate up to two per cent by the end of 2011.

Unemployment is expected to continue rising and peak in the autumn, added the CBI.

CBI chief economic adviser Ian McCafferty said: "The state of the public finances means this recovery will be led by the UK consumer, private sector investment and the re-building of stocks. But headwinds from tight credit conditions and the desire to borrow less and pay down debt will hold this back somewhat."