CBI forecasts sluggish start to 2011

UK economic growth will drop to a “very sluggish” level in the first quarter of 2011 as consumer spending weakens, the Confederation of British Industry has said.

Reduced household spending after the VAT rise will hold back first-quarter growth to about 0.2 per cent, down from 0.8 per cent at present and a slight reduction on its previous forecast of 0.3 per cent.

The CBI’s latest economic recovery revised the 2012 growth forecast upwards to 2.4 per cent, but said this is still very subdued for the late stages of a recovery.

“The pace of recovery in the UK economy has been slightly stronger over the past year than we and many others had expected, and somewhat faster than typical during the first year out of a recession.

"But we do not expect that rapid pace of growth to continue over the next two years of recovery,” said CBI chief economic adviser Ian McCafferty.

The forecast cautioned that inflationary pressures will remain high over the course of 2011, and “significantly exceed” the stated two per cent target of the Bank of England.

“The persistent strength of energy and commodity prices is a growing concern, as it is likely to mean that inflation does not fall back quite as sharply as many hope,” McCafferty said.

The CBI said it expected the Bank to begin to “normalise” monetary policy in the spring, followed by a slightly faster stimulus withdrawal over the second half.

It expected interest rates to rise from the current record low of 0.5 per cent to 2.75 per cent by the fourth quarter of 2012.

But the CBI still believes a double-dip recession is unlikely, even if the recovery remains “fragile” and has predicted “fairly modest” growth of 0.4 per cent, 0.5 per cent and 0.5 per cent over the second, third and final quarters of 2011.