The UK will begin its climb out of what has been a "shallow" recession early next year with GDP growth hitting near-trend rates by the end of 2009, according to the Confederation of British Industry (CBI).
In its latest economic forecast, the CBI says the UK economy will begin to stabilise over the next six months ahead of a gradual recovery, although it says growth in 2009 will be “feeble at best”.
It predicts the country will this year enter a technical recession - with two consecutive quarters of negative growth – and says it has cut its GDP growth forecast for 2008 from 1.7% to 1.1%.
In addition, it says it expects CPI inflation to hit a peak of 4.8% this quarter before falling to close to the Bank of England's 2% target by the end of 2009.
Richard Lambert, CBI director-general, says: “Over the past year our forecasts for economic growth have been shaved lower and lower as the UK economy continues to struggle with the twin impact of higher energy and commodity prices and the credit crunch. Growth in 2009 will be feeble at best.
“Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived. This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged.
“The squeeze on household incomes and company profit margins from higher costs will begin to ease as the price of oil moves downwards and, although the credit crunch will be with us for some time, conditions are set to improve later in 2009.”
The CBI says once the short-term inflationary pressures have peaked, the inflation outlook into 2010 will allow the Bank to make a series of rate cuts to bring the base rate down to 4% by next spring.
“The Bank should have leeway to cut interest rates and, as inflation falls, we should be well placed to move beyond this difficult stage in the business cycle,” Lambert says.
“If all goes well there should be room for a half point cut in November to help restore confidence in the beleaguered economy.”
Forecasts for investment have been downgraded, with fixed investment now expected to shrink by 3.5% in 2008 and by 4% next year, compared with flat growth predictions in the last CBI forecast.
Much of this decline comes from the weak outlook for investment in buildings, the CBI says, as both residential and commercial property markets continue to struggle.
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