CBI: Subdued 2010 and rate rises in spring

A SUBDUED 2010 lies ahead for the UK economy and, despite a brighter outlook for the following year, the economy will not have reached pre-recession levels until the end of 2011, the Confederation for British Industry (CBI) will say today.

Annual GDP growth for 2010 will be 1.2 per cent, compared with the 0.9 per cent previously expected. The first half of 2010 will see very weak growth and no sharp rebound. But the CBI does not forecast a full-blown double-dip despite a central forecast for growth of just 0.3 per cent in the first and second quarters.

Strength will return in the second half of the year and quarterly growth of 0.5 to 0.7 per cent is expected to be maintained in 2011, putting the annual expansion at 2.5 per cent.

The CBI also expects the Bank of England to raise interest rates as early as the spring of next year in a bid to normalise monetary policy. It forecasts the headline rate to hit two per cent by the end of 2010 and remain at this level throughout 2011.

However Ian McCafferty, chief economic adviser at the CBI, said: “The tactics of the Monetary Policy Committee (MPC) remain unclear throughout 2010.”

He added: “The MPC is likely to hike rates and withdraw QE in parallel rather than sequentially because it allows the committee to be more sensitive to market conditions.”

Encouragingly, the CBI forecasts that unemployment will peak at a slightly lower level than previously forecast, at just over 2.8m in the third quarter of 2010.

But it warned that the private sector’s pain is only now being felt in the public sector and one could anticipate some industrial relations concerns over the course of 2010.

Although the CBI increased its inflation forecast to 2.3 per cent for 2010, it expects that inflation will remain low despite a volatile headline measure.