The CBI has downgraded its projections for UK growth this year and next.
It now reckons the UK will expand by 1.8 per cent this year, and by 1.7 per cent in 2009.
Most economic reports, including those from the chancellor, have predicted a pick-up in 2009, so in saying next year things will be worse, the CBI is going against the consensus – although, there are good reasons to believe it is right.
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 per cent 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 per cent predicted in the previous forecast.
Due to the slowing economy, however, it expects inflation 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 per cent by early 2009.
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.
“So it is vitally important to keep the story in perspectives,” said CBI director general Richard 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.”
So actually, although the CBI report is being hailed in the press this morning as another example of doom – its conclusion is quite positive. Let’s hope it is right.
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