The CBI predicts the UK economy will grow at a slightly faster rate than expected in 2010, but growth will be more ‘sluggish' than previously thought in 2011 thanks to the emergency budget.
The CBI's latest forecast says the economy will grow by 1.6% this year, a 0.3% increase on its June forecast, due to better than expected Q2 growth.
However, the GDP forecast for 2011 has been revised down from 2.5% to 2.0%, taking into account the measures revealed in the emergency budget.
Consumer spending is set to be weak in 2011 due to high inflation, which is expected to stay above 2% until 2012. This will be caused by the VAT rise in January and low wage increases, according to the forecast. Despite this, the CBI says a double dip recession is unlikely.
"The degree of uncertainty around the outlook remains high, but our view is that the UK's tentative recovery will be sustained, albeit with weaker levels of growth," says Richard Lambert, director-general of the CBI.
"The fragile nature of the recovery is why, in the forthcoming spending review, the government must focus its scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment."
Ian McCafferty, chief economic adviser at the CBI, says: "While the outlook for growth in 2010 has been lifted slightly, due to slightly faster economic activity in the second quarter of the year, the outlook for next year will be more restrained.
"The action to get the public finances back onto a sustainable footing will no doubt temper the recovery going into 2011.
"We do expect exports to grow at a faster rate than imports however, with net trade making a positive contribution to GDP growth during the coming 15 months."
The forecast says UK exports will grow by 3.5% in 2010 and 6.4% in 2011. Unemployment is expected to rise gradually from 2.48m at the end of 2010 to 2.62m at the end of 2011. Meanwhile, public sector borrowing is set to reach £141bn in 2010/11, and then fall to £116bn in 2011/12.
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