The CBI is publishing its latest economic forecast against a worsening international backdrop. Last month the International Monetary Fund revised its forecast for world economic growth sharply downwards, and recent economic data have dashed hopes that growth in the emerging economies would soften the impact of the global downturn.
The UK’s leading business group predicts the recession, which began in the third quarter of 2008, will last throughout 2009. The economy is expected to contract by 3.3 per cent and unemployment will reach close to 2.9 million by the end of the year. After six quarters of negative growth, the economy is expected to stabilise early next year with the recovery building throughout 2010.
Richard Lambert, Director-General of the CBI, said: “In recent months we have seen a slew of gloomy economic data from across the globe, showing world economic activity plunging sharply. Faced with a global confidence crisis, a rapid fall in demand and credit constraints, UK firms have been forced to scale back investment and cut jobs.
“The outlook remains extremely uncertain so forecasting remains especially difficult. Ultimately the severity of this recession will depend on the speedy implementation of the Government’s measures to unblock the credit markets and the success of various global stimuli packages in repairing business and consumer confidence.
“However, during the second half of the year the impact of interest rate cuts, falling inflation, the relative weakness of Sterling, plus the fiscal boost, should start to have a stabilising effect.”
The CBI predicts the economy will contract by a cumulative 4.5 per cent over the six quarters of negative growth. GDP growth for 2009 has been revised down from -1.7 per cent in November to -3.3 percent. In 2010, GDP growth is expected to be 0.0 per cent.
The speed and severity of the recession, combined with the impact of lower energy prices and the recent VAT cut, will push CPI inflation to a low of -0.1 per cent in the third quarter of this year. In 2010, inflation will remain under the Bank of England’s two per cent target. Nominal interest rates are expected to stay at a very low level until the end of 2010.
As the recession deepens, unemployment is expected to rise sharply over the course of 2009. The CBI predicts unemployment will peak at just over 3 million (9.6 per cent) in the second quarter of 2010.
Consumers worried about losing their jobs will be spending less and saving more, dampening household spending. The CBI expects household consumption to contract by 2.7 per cent in 2009.
Average earnings growth is expected to weaken over the first three quarters of the year to a low of 1.1 per cent, as more people are prepared to accept pay freezes and pay cuts. But the rate of growth is expected to pick up to 2.5 per cent by the end of 2010.
Businesses will continue to scale back on investment sharply throughout the year. Business investment is expected to shrink by 9.2 per cent in 2009 and 1.7 per cent in 2010.
The impact of the recession and the fiscal stimulus will take a toll on the public finances with net borrowing for 2009/10 expected to reach £149 billion and £168 billion in 2010/11, which represent 10.6 per cent and 11.8 percent of GDP respectively.
Ian McCafferty, CBI Chief Economic Advisor, said: “The crisis of confidence caused by last October’s financial turmoil resulted in a sharp and sudden fall in global output, including across the emerging economies.
“Given the rapid contraction in global economic activity, and the continuing credit squeeze, we believe the UK will be mired in a deep recession for the whole of 2009, lasting six quarters in total and accompanied by a significant rise in unemployment.
“The most urgent requirement is to get the various credit support schemes, announced recently, underway. Faced with continued uncertainty about access to credit, firms will continue to take drastic action to protect their businesses. But if we can get credit flowing across the economy, the considerable monetary and fiscal stimuli already in the pipeline should start to feed through later in the year and provide the pre-conditions for an eventual recovery through 2010.”