CBI forecasts bumpier ride over next two years

THE CBI has downgraded its 2008 outlook for UK growth and is forecasting even slower growth in 2009 due to continued troubles in the credit markets, rising commodity prices and weak domestic and global demand.

In its latest quarterly economic forecast, the UK’s business group has lowered its figure for this year’s rate of GDP growth by 0.2% to 1.8%.

The forecast for next year has also been downgraded, with the CBI’s figure of 1.7% GDP growth for 2009 contrasting with the Chancellor’s more optimistic forecast in the recent Budget of between 2.25% to 2.75%.

At the same time as the economy slows, inflation is due to rise. The CBI now expects the CPI rate of inflation to peak at 3.2% in the third quarter of 2008, compared with the 2.7% peak predicted in the previous forecast.

Owing to the slowing economy, however, inflation is expected to come down in the longer term. As a result, the CBI expects the Bank of England to cut interest rates in the second and fourth quarters of this year, with one more reduction early next year, bringing interest rates down to 4.5% by early 2009.

Richard Lambert, director general of the CBI, said: ‘Having enjoyed two years of strong growth, we are now living in uncertain times. We are facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth.

‘Outside the financial and property sectors the overall mood of business is, however, nothing like as gloomy as you might guess from reading today’s headlines. While there are signs of a high street slowdown and some firms say it’s getting harder to raise bank finance, around the country many still report quite positive conditions.’

As such, Mr Lambert said it was vitally important to keep the story in perspective. ‘After a few good years, the UK corporate balance sheet is in good shape. Our flexible labour market is a real force for stability and our best bet is still that our economy will continue to show modest growth this year and next, before starting a gradual recovery,’ he said.