The CBI’s latest economic forecast says that despite a squeeze on household income and public spending cuts, this year’s GDP growth rate will be 1.7 per cent, marginally lower than the previous forecast of 1.8 per cent.
Growth of 2.2 per cent is expected in 2012, down slightly from February’s forecast of 2.3 per cent.
Stronger net exports are expected to make a strong contribution to the UK economy both this year and next. Export growth of 8.6 per cent in 2011 and 7.6 per cent in 2012 is expected to outpace the rise in imports over the period, resulting in a net positive impact on GDP.
CBI also thinks that business investment will help drive economic growth. Survey evidence shows historically strong investment intentions, with growth of 8.8 per cent in 2011 and 8.7 per cent in 2012 forecast.
John Cridland, CBI director-general, said: “Although there are a number of risks to the UK’s economic outlook, we continue to expect that the recovery will make further headway this year and next, but the pace will be sluggish.
“The economy is battling headwinds of squeezed household budgets, weak wage growth, high inflation, and necessary public spending cuts.
“But there are some brighter spots in the forecast. Global economic conditions remain upbeat, and we expect to see a stronger performance by UK exporters. Business investment will also make a firm contribution to growth in 2011 and 2012. But the rebalancing of the economy is going to take time to feed through, and domestically it may not feel like much of a recovery for some time yet.”
Quarter-on-quarter growth rebounded at a modest rate of 0.5 per cent in the first quarter of this year, following a decline of 0.5 per cent in the final quarter of 2010. The CBI’s forecast for the remainder of 2011 is for a growth of 0.6 per cent over each of the three remaining quarters.
Inflation is anticipated to be higher in 2011 and into early 2012 than previously forecast, largely due to the effect of higher commodity prices, oil in particular. But as the impact of the VAT rise falls away, inflation is expected to fall back closer to the Bank of England’s two per cent target rate next year.
Nevertheless, with inflation expectations edging upwards, the Bank is expected to begin the process of normalising monetary policy later this year. Modest interest rate rises are likely from Q3 2011 through to mid-2012, followed by a slightly faster monetary stimulus withdrawal over the second half of 2012. This would take the Bank rate up to 2.5% by Q4 2012.
Ian McCafferty, CBI chief economic adviser, said: “The recovery continues to be choppy and lacking in vigour. Expansion in certain sectors is being offset by weaker performance in others. What remains striking is how little we expect the pace of growth to accelerate in 2012, and that it will be far less robust than we’d normally expect in the second and third years of a recovery.”
Unemployment is expected to peak in Q4 2011, at 2.62 million. And while it will remain stubbornly high next year, it will fall back to 2.52 million by Q4 2012.
Pay growth is expected to pick up somewhat over the coming two years, but remain subdued. Accordingly the household spending is forecast to grow more slowly than previously thought, by only 0.2 per cent in 2011 and 1.1 per cent in 2012.