CBI downgrades 2009 economic growth to 1.7%, consumption is forecast to slow to just 1.6% this year

The CBI has downgraded its 2008 outlook for UK growth, and it forecasts 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 down 0.2% to 1.8%.

The forecast for next year has also been downgraded and the CBI’s figure of 1.7% GDP growth for 2009 contrasts 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 expects that the CPI rate of inflation will peak at 3.2% in Q3 of 2008, forcing the Governor of the Bank of England to write a second letter to the Chancellor. This compares with 2.7% predicted in the previous forecast.

Due to the slowing economy, however, inflation is expected to come down in the longer term. So, the CBI expects the Bank of England will be able to cut interest rates in the second and fourth quarters of this year, with one more reduction early next year. This would bring interest rates down to 4.5% by early 2009.

Richard Lambert, the CBI’s Director-General 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.

He added that outside the financial and property sectors the overall mood of business is less gloomy. ‘It is vitally important to keep the story in perspective, said Lambert. ‘Although painful, write-offs by British banks represent a tiny fraction of their capital. 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.’

The biggest downward revision in the CBI's forecast has been to household spending, as purchasing power is heavily squeezed by higher food and energy prices. Consumption is forecast to slow more sharply than previously thought, from growth of 3.1% last year to just 1.6% this year, down 0.3% on the previous forecast in December.

The CBI’s forecast for net trade has improved for 2008 and 2009, with exports growing by 3.8% this year and 5.5% in the next, compared with imports growing at just 2.2% and 3.3% respectively.

Investment is forecast to slow this year – growing by 1.4% compared with 5.0% in 2007. A modest fall in property expenditure contrasts with continued growth in government spending and business investment.

Ian McCafferty, the CBI’s chief economic adviser said: ‘The UK economy is being buffeted by some strong headwinds, with the prolonged troubles in the financial markets making for a bumpier ride both this year and next. High commodity prices are adding to inflationary pressures and significantly squeezing household incomes. And some households are feeling a chill from the credit freeze, with lending conditions becoming tighter. ‘

‘That said a slower economy will bring inflation down in the medium-term, so the Bank should be able to cut interest rates twice in 2008 and again early in 2009. Also on a brighter note, UK exports are being helped by a weaker pound, as the latest CBI manufacturing figures have confirmed.’

Other key points of the economic forecast and report include:

RPI inflation, often used as a starting point for wage negotiations, will come down from 4.3% last year to 4.0% in 2008, for the year as a whole. Lower house price inflation and falling interest rates will bring it down further in 2009, to 2.9%.

The CBI's forecast for GDP growth in 2008 and 2009 suggests that public borrowing is likely to rise further than was contained in the Budget: 43.2bn pounds in 2008 rising to 46bn pounds in 2009.

Unemployment figures have been revised down slightly for 2008 to 1.65m but are unchanged for 2009 at 1.75m since the previous forecast.