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Economic outlook brightens, but conditions remain tough

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 said today.

Revealing its latest economic forecast, the CBI said that near-term economic prospects are brightening. 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% in 2009 Q3, edging up to 0.4% 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% in Q1 2010, and 0.3% in Q2.

“The outlook is improving as the UK draws strength from quantitative easing, a weak pound and a recovering global economy,” said CBI director-general Richard Lambert. “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%, which is close in magnitude to the cumulative 5.9% seen in the early 1980s. The CBI forecasts that GDP will shrink by 4.3% in 2009 and grow by 0.9% 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% 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% 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 Q2.


Following its largest fall in over 40 years in Q2, business investment is expected to continue declining over the rest of 2009, shrinking by 17.7% in the whole year. It is forecast to stabilise early next year before starting to recover, but any rises in business investment will be heavily constrained by fears of excess capacity and concern about the strength of future demand. This means that the level of business investment in 2010 will still be down on this year, by 5.7%

As the global economy picks up and a relatively weak pound makes UK goods more attractive, UK exports should improve into next year to achieve growth of 1.7% in 2010.

The public finances remain in very poor health, and net borrowing in 2009/10 is expected to reach £176.2bn and £181.8bn in 2010/11, which would both represent 12.6% of GDP.

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