Slow pace of recovery in 2010

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MODEST economic growth in the third and fourth quarters of this year will initiate the emergence of the UK from the recession. However, the growth in 2010 will be slow due to constraints on demand, predicted the CBI in its latest economic forecast.

The CBI predicts that UK GDP will post quarter-onquarter growth of 0.3% in 2009 Q3, moving up to 0.4% in Q4 as consumers bring spending forward in advance of the VAT increase in January. However, this will dampen spending in early 2010 and although companies may be rebuilding stocks, they are likely to do so very cautiously. As a result, 2010 should start with very weak growth of only 0.1% in Q1 2010, and 0.3% in Q2.

Richard Lambert, CBI director-general, commented: “The outlook is improving as the UK draws strength from quantitative easing, a weak pound and a recovering global economy. Although growth this quarter should mark the end of the recession, conditions in the UK will remain tough for some time yet, and it is difficult to see where demand growth will come from. Firms that have run down their stocks will now be starting to raise output to meet demand, and consumers are likely to bring forward spending before VAT rises. But once these two boosts are out of the way there is no clear driver of robust economic growth into 2010.

CPI inflation is forecast to remain below the Bank of England’s 2% target for the rest of 2009, but should then rise above target in early 2010 when VAT increases, before settling below target for the remainder of 2010.

Unemployment is expected to continue rising, but at a progressively slower pace. Household spending will stay under significant pressure as consumers remain worried about job losses, see weak wage growth, and opt to increase savings and cut debts.

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