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Tentative UK recovery to slowly gather pace over next two years

The UK economy is expected to exit the recession in the fourth quarter of 2009, but thereafter growth will remain subdued and GDP is unlikely to have reached pre-recession levels by the end of 2011, the CBI says.

CITY & CORPORATE

Tentative UK recovery to slowly gather pace over next two years

The UK economy is expected to exit the recession in the fourth quarter of 2009, but thereafter growth will remain subdued and GDP is unlikely to have reached pre-recession levels by the end of 2011, the CBI says.

Its latest economic forecast predicts that the recession will end when UK growth resumes in the fourth quarter of this year (0.5% quarter-on-quarter), helped by consumers bringing their spending forward to beat the VAT rise.

Subsequent growth in the first two quarters of 2010 will be weak at 0.3%, but this should strengthen as the global economic recovery gathers pace, businesses rebuild stocks and household spending recovers. Growth in the range of 0.5% to 0.7% is expected to be maintained through to the end of 2011.

As a result, the UK’s leading business organisation predicts annual UK GDP growth of 2.5% in 2011, following 1.2% in 2010. However, despite two years of economic expansion, UK GDP will still not have returned to its pre-recession level by the end of 2011, which illustrates the depth of the recession and the weakness of the economic recovery.

John Cridland, CBI Deputy Director-General, said: "The outlook is brightening as the global economy finds its feet, although we will need to keep our nerve during early 2010, and there is no sign of a clear driver of strong economic growth. In the spring many staff will face another cycle of wage freezes, and job losses will continue rising until the autumn.

"Although the first few months of 2010 will be difficult, growth will gradually pick up and increasing confidence and demand will lead the UK into a more positive 2011. Consumer spending looks to be slightly more resilient than we first thought, and a weaker pound will help to support export growth.

"However, the economy will be on a fragile path of very slow growth, as we continue to feel the lasting effects of the financial crisis. And it remains vital that government sets out clearer plans to address the fiscal deficit at its next opportunity in order to help shore up future UK economic prospects."

Unemployment is expected to continue rising over the coming quarters, but peaking slightly lower than previously forecast, at just over 2.8m in 2010 Q3. And after very constrained wage growth during 2009 and 2010, average earnings are expected to rise somewhat faster over 2011, at 3.9%.

Household consumption is forecast to contract marginally by -0.2% quarter-on-quarter in 2010 Q1, partly as sales fall back in response to the VAT rise. However, it should then grow steadily but very slowly over the remainder of 2010, to give a modest annual growth rate of 0.4%. That figure should improve to 2.3% in 2011, as household incomes grow more strongly and jobs fears abate.

Ian McCafferty, CBI Chief Economic Adviser, said:

"The UK economy faces a number of structural hurdles over the coming two years, and this recovery - like that of the 1980s - will be relatively drawn out. Credit conditions will remain difficult as the banks slowly nurse themselves back to health, consumer spending will be shaped by the need to rebuild savings, and the public sector will soon have to tighten its belt. All three factors will act as headwinds to growth."

The planned VAT rise in January will push CPI inflation up sharply before it eases back during 2010 and falls below the Bank of England's 2% target throughout 2011. Oil prices are expected to rise continually over the coming two years, as the global economy recovers with a relatively limited oil supply, hitting almost $100 per barrel at the end of 2011.

The UK Bank rate is forecast to start rising in spring 2010, as the Bank of England withdraws some of the monetary stimulus in order to minimise the risk of undesirable inflationary pressure in the medium term. The Bank rate is expected to reach 2% by the end of next year, with no further rises during 2011, to assist the sustainability of the recovery as fiscal policy begins to tighten.
Business investment, which has fallen heavily throughout 2009, should start to recover in the spring of 2010 but is likely to remain hindered by excess capacity, weak demand, and credit supply issues.

The strengthening global economy and relative weakness of sterling should spur UK exports to growth of 1.9% in 2010 and 5.3% in 2011.
The public finances will remain in very poor health for some time, with net borrowing of £180.8bn in 2009/10 rising to £184.1bn in 2010/11, before falling slightly to £154bn in 2011/12.

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