Hard year ahead, predicts CBI

17 November 2008

The looming recession will see the UK economy contract by 1.7 per cent next year, the CBI has forecast.

The employers' organisation also predicted that unemployment would climb to three million by 2010.

In its revised economic forecast, the CBI said that it believed the economy would grow by just 0.8 per cent in 2008, down from the previous estimate of 1.1 per cent.

The economy is expected to shrink quarter-on-quarter by 0.8 per cent between October and December this year, and to contract again for a subsequent three quarters before beginning a slow recovery through 2010.

The slowdown in the economy should also herald a sharp fall in inflation, the CBI added, with CPI inflation expected to drop from 4.2 per cent this quarter to 1.7 per cent by the end of 2009, undershooting the Bank of England's 2 per cent target. Into 2010, inflation is likely to fall back further to a low of 1.1 per cent, averaging just 1.2 per cent over the year.

As the cost of living slides, so the Bank of England will have further scope for rate cuts; the basic rate may drop to as low as 1.5 per cent, the CBI predicted.

John Cridland, the CBI's deputy director-general, said: "Since our last forecast was published in September the banking system has come under immense strain, sending consumer and business confidence plummeting in its wake.

"Given the speed and force at which the downturn has hit the economy, we have reassessed and downgraded our expectations for UK economic growth. But the fast-moving and global nature of this crisis means it is impossible to look far ahead with any certainty."

Mr Cridland added: "What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting. An unwelcome consequence of the downturn will be a significant loss of jobs, many of them in sectors that have been relatively insulated until now."