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CBI cuts growth forecast

31 Aug 12 Business leaders are predicting that growth will return to the UK economy towards the end of the year, and pick up a little pace during 2013.

The CBI’s latest quarterly economic forecast puts GDP growth in 2012 to be -0.3%, below its previous forecast in May of +0.6%. This reflects a more negative first half-year and a more modest rate of growth in the second half than was expected in May.

The CBI expects some improvement in GDP growth late in 2012, with a bounce-back from the Jubilee effect and inflation falling a little further. In the third quarter of 2012, quarter-on-quarter growth is expected to be +0.6%, followed by +0.2% in the final three months.

In 2013, the CBI forecasts GDP growth of +1.2%, revised down from its previous forecast of +2%, mainly reflecting a smaller contribution from net trade, given a weaker rate of global growth than previously forecast. But the risks for this forecast are on the downside given on-going global uncertainty.

Heavy discounting by retailers and a sharp fall in world commodity prices has led to a faster-than-expected drop in the rate of inflation. Combined with weak wage growth, inflation is expected to fall back a little further by the end of the year, and should remain close to the Bank of England’s 2% target throughout 2013.

The rapid fall in inflation means the pressure on household spending is easing faster than previously thought, despite wage growth remaining weak. During 2013, real disposable incomes should begin to rise again, for the first time since 2010. This should give something of a modest boost to consumer spending, although households are likely to remain cautious given the relatively weak labour market.

The CBI does not expect unemployment to increase by as much as previously thought, peaking at 2.7m in mid-2013.

With high levels of uncertainty persisting in the economy, growth in business investment is expected to remain modest, at around 5% this year and 3.8% in 2013.

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Difficult conditions in the global economy, particularly the Eurozone and the US, mean export growth is likely to be weaker than was forecast in May. The CBI expects a small contraction this year (-0.4%), followed by an increase next year (3.5%), with demand from faster-growing, emerging markets likely to provide some support.

CBI director-general John Cridland said: “At present I believe the economy is flat rather than falling but, nonetheless, momentum seems to have weakened and the latest official figures put the UK in recession for the second quarter of this year.

“Underlying growth will return to the economy later in the year than previously expected, with a somewhat better outlook next year.

“However, euro area uncertainty, and the looming “fiscal cliff” of spending cuts and tax increases in the US will only add to the sense of unease during the coming months.”

CBI head of economic analysis Anna Leach added: “While we expect GDP to rise in Q3 as the Jubilee effect unwinds, our survey data indicate that underlying conditions are close to flat, so the economy is likely to remain quite listless through the remaining months of 2012.

“On a more positive note, we expect the pressure on household incomes to continue to lift through the remainder of this year, as inflation falls further, and this should put the recovery on a slightly firmer footing next year.”

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