THE Confederation of British Industry has downgraded its economic growth forecasts for 2011 on the back of low consumer spending but set its stall against more quantitative easing, warning that this could "spook" the market.
Just days after official statistics revealed that the UK economy grew by just 0.2% in the last quarter, the CBI said it now expects growth of just 1.3% for the year, against its 1.7% forecast in May.
When it first set out its forecast at the end of 2009, the business group was hopeful that UK gross domestic product (GDP) would grow 2.5% this year.
CBI director-general John Cridland said: “It is obvious that the outlook for the economy has become even more challenging.”
However, he added: “We do not believe the recovery has stalled. We are still going to make headway.”
He continued: “We said that in the UK the process of recovery was going to be a long hard slog and so it is proving.
“Consumer spending in particular has taken a hammering as accelerating inflation has led to subdued income.”
He also pointed to “sluggish growth” from major world economies, rising commodity prices, the eurozone sovereign debt crisis and falling confidence hitting business investment as reasons for the slowing of growth.
The CBI is hopeful that the economy will grow 0.8% in the current quarter to compensate for factors such as the extra royal wedding bank holiday and the Japanese earthquake constraining growth in the quarter to the end of June.
It anticipates growth of 0.5% in the final quarter of 2011.
The CBI reiterated its prediction that the economy will grow 2.2% next year.
The news will add to worries about the state of the Scottish economy. Figures published in July revealed Scotland had seen growth of just 0.1% in the first quarter. This came after a 0.5% contraction over the previous three months.
However, the CBI remains firmly against further quantitative easing, a policy that has been advocated by Business Secretary Vince Cable in recent days.
The CBI’s chief economic adviser Ian McCafferty said that inflation is expected to continue to rise and the CBI thinks it could peak at over 5% later this year.
He said: “I believe were the bank to move towards quantitative easing, at this stage it would probably spook the markets.”
This could lead to higher borrowing costs for the UK as investors price in expectations of higher inflation and rising interest rates.
Mr Cridland opposed a cut in VAT, the preferred policy of Labour’s shadow chancellor Ed Balls: “The question is how would they fund it? VAT cuts are very expensive. It is not clear to me that they are affordable.”
He also dismissed the scaling back of public spending cuts: “Spending cuts are not the predominant reasons why we have had this soft patch.” He said cuts are a “vital component” of a domestic recovery.
Mr McCafferty said growth in consumer spending would be limited to just 0.6% for 2011. “It is clear that in the domestic economy consumers are going to continue to face very difficult conditions this year. This is because of the ongoing squeeze on income from the combination of high inflation and weak wage growth.
“Real disposable income is expected to fall for the second year running.”
The CBI does not expect interest rates to rise until early 2012.
The body suggested there could be some relief for businesses facing rising input costs.
Mr Cridland said: “We do not expect commodity prices to fall sharply but we hope we have seen the worst of the squeeze in this area.”
He said the main risk to the UK economy was the sovereign debt crisis in the eurozone. “Eurozone risk is the one we must have the most of an eagle eye on.”
He added: “Uncertainties are higher than normal and the downside risks greater.” However, he insisted: “The UK economy remains on track.”
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