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CBI: Recession easing. Slightly

Research by the Confederation of British Industry (CBI) shows the recession persisting until early 2010 with slight growth, but the economy has stabilised in the meantime.

The CBI’s say that the “falling off a cliff” nature of the credit crunch has had deep-seated consequences which will take time to worth through the rest of the economy. but: “confidence of businesses and consumers is
noticeably less downbeat than a few months ago.”

However: “the massive negative shock that we have had from the credit crunch will take time to dissipate, and it is difficult to see where there will be sources of solid and sustained demand growth in the economy over the next few quarters.”

The CBI’s conclusions suggest that the government’s policies to deal with the recession have been broadly effective, although the CBI has identified: “weakness” in construction investment over the early part of 2009 leading to a revised outlook for business investment, which is expected to shrink by 12.4% this year, from the -9.3% expected in April, and by a further 1.4% in 2010.

CBI Director-General Richard Lambert said: “The world recession has deepened, so it is not surprising that the UK economy has continued to suffer. However, the harshest period of the recession looks to be behind us, the economy is stabilising and this should continue during the second half of this year.

“The return to growth is likely to be a slow and gradual one; difficult credit conditions are still affecting business behaviour. For positive growth to return, lenders need to feel more confident so that credit can start flowing again.

“Some commentators have been carried away by recent tentative indicators as evidence of ‘green shoots’. It will take some time before we can be sure these shoots have roots we can depend on for sustainable growth and, in the meantime, the government must do everything it can to help firms get access to credit,” he said.

The economy should expect modest growth to resume during the first three months of 2010, with the pace of growth gradually picking up during next year.

The CBI says UK GDP, supported by low interest rates and quantitative easing, should flatten out during the second half of 2009, with quarter-on-quarter figures of -0.1% and 0% in Q3 and Q4, and modest quarter-on-quarter growth of 0.1% and 0.3% in Q1 and Q2 of 2010.

The CBI expects that, by the end of the recession, the economy will have shrunk by a cumulative 4.8% - not as severe as the 5.9% seen in the early 1980s - after five consecutive quarters of falling GDP.

Very slight growth will begin at the start of 2010, with the pace picking up slowly, such that trend growth rates are restored only by the end of the year. For 2010 as a whole, this profile yields an average annual GDP growth of a modest 0.7%. This follows a fall this year in GDP of 3.9%.

CBI Chief Economic Adviser Ian McCafferty said: “We still have some way to go before the UK economy is truly out of the woods and we see sustainable growth. For consumers, some of the worst fears of earlier in the year may now not be realised, but they will still face tough times as higher saving and lower income eat in to their ability to spend.

“However, the restraint shown by businesses and their staff in setting pay awards and accepting short-time working should help to curb the pace of job losses, lessening the pain for some, and shows the real strength of Britain’s flexible labour market,” he said.

The labour market is proving to be even more flexible than hoped, with many more private sector employees accepting wage freezes and short-time working than in previous downturns, limiting the pace of job losses through 2009.

The CBI now expects unemployment to peak at a slightly lower level than previously thought. Unemployment is still expected to rise until Q2 2010, to a peak of 3.03M (9.6%), before edging lower during the remainder of 2010.

CPI inflation is expected to fall below the Bank of England’s target of 2% in 2009 Q3 and remain there throughout the forecast period to the end of 2010. Quantitative easing is expected to continue for some months yet, but by the spring of next year, the Bank is expected to wish to return monetary policy gradually towards a more normal footing, with very modest increases in the official rate of interest from its current 0.5%.

As a result, the CBI’s figures show household consumption shrinking by 2.9% in 2009, and growing only modestly in 2010 (0.5%).

Whereas firms have reduced their stock at a rapid pace at the start of this year, this should now begin to ease and firms should start re-building their stocks next year.

The public finances are expected to be under growing pressure from the recession and net borrowing is expected to reach £172.3bn in 2009/10 and £182.2bn in 2010/11, representing 12.2% and 12.6% of GDP respectively.

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