Economic outlook brightens but 2010 remains tough says CBI

The UK economy is expected to emerge from recession through modest growth in the third and fourth quarters of this year, but constraints on demand will ensure that growth in 2010 is fragile, the CBI has announced.

A recovery is underway in the global economy, which has been boosted by substantial fiscal and monetary stimuli, and the inventory cycle is starting to turn, both at home and abroad, which is helping to lift production. However, the pace of recovery in 2010 is expected to be slow.

The CBI predicts that UK GDP will post quarter-on-quarter growth of 0.3 per cent in 2009 Q3, edging up to 0.4 per cent in Q4 as consumers bring spending forward in advance of the VAT increase in January. However, this will dampen spending in early 2010 and although companies may be rebuilding stocks, they are likely to do so very cautiously. As a result, 2010 should start with very weak growth of only 0.1 per cent in Q1 2010, and 0.3 per cent in Q2.

Richard Lambert, CBI Director-General, said: "The outlook is improving as the UK draws strength from quantitative easing, a weak pound and a recovering global economy. Although growth this quarter should mark the end of the recession, conditions in the UK will remain tough for some time yet, and it is difficult to see where demand growth will come from.

"Firms that have run down their stocks will now be starting to raise output to meet demand, and consumers are likely to bring forward spending before VAT rises. But once these two boosts are out of the way there is no clear driver of robust economic growth into 2010.

"Growth next year will remain very weak, while job losses will continue and household consumption will stay tightly squeezed. The sharp fall in business investment this year is a real concern, as are the public finances, and both will affect UK economic prospects in the years to come."

After five consecutive quarters of contraction, UK GDP has fallen by a cumulative 5.5 per cent, which is close in magnitude to the cumulative 5.9 per cent seen in the early 1980s. The CBI forecasts that GDP will shrink by 4.3 per cent in 2009 and grow by 0.9 per cent in 2010.

Although inflation has been on a clear downward trend over the past year, it is likely to fluctuate over the course of the year ahead. CPI inflation is forecast to remain below the Bank of England's 2 per cent target for the rest of 2009, but should then rise distinctly above target in early 2010 when VAT increases, before settling below target for the remainder of 2010. The UK Bank rate is still expected to start rising in spring 2010, reaching 2 per cent by the end of the year.

Unemployment is expected to continue rising, but at a progressively slower pace. The CBI still sees unemployment peaking at around three million in 2010.

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