Uncertainty Means Economic Recovery Will Remain Subdued

Growth will restart in 2012, but high levels of uncertainty around the economic outlook, mainly driven by the situation in the euro area, mean growth will remain subdued, particularly in the first half of this year.

The CBI expects 0.9% GDP growth in 2012, a little down from November’s forecast (1.2%), mainly reflecting the impact from the GDP contraction in the fourth quarter of last year. Modest growth of 2.0% is predicted in 2013.

Quarter-on-quarter growth will remain fragile in the first two quarters of this year (0.2%, 0.2%), improving modestly in the second half of the year (0.6%, 0.5%), as inflationary pressures ease.

CPI inflation will fall towards target levels (2.2%) in the fourth quarter of 2012, and will remain close to Bank’s 2.0% target throughout 2013. This will relieve some of the pressure on household incomes, with consumer spending picking up slightly in the second half of this year.

But households will remain cautious because of modest wage growth and continuing high unemployment, which is likely to peak at 2.9 million in the first quarter of 2013.

Net trade and business investment will continue to provide the most positive contributions to growth, with exports growth of 4.3% and 6.4% expected in 2012 and 2013 respectively. Total business investment of 4.3% is forecast for 2012 and 5.0% for next year.

John Cridland, CBI Director-General, said: "Economic conditions will continue to be tough, especially in the first half of the year, and the UK recovery will depend on the successful resolution of the Eurozone crisis.

"But some activity has picked-up since before Christmas and the mood among many businesses has improved, with exception of companies serving the UK consumer where business remains flat.

"Although risks remain we expect growth this year, improving modestly in 2013, primarily driven by positive net trade and business investment.

"The pressure on household incomes will also ease slightly in the second half of this year as inflation falls, resulting in a slight increase in consumer spending. But weak wage growth and high levels of unemployment will continue to be a brake on household spending."

Growth in household consumption will remain flat in the first half of the year, -0.1% and 0.0% in the first two quarters respectively, but quarter-on-quarter growth will increase in the second and third quarters of 2012 (0.4% and 0.3%).

Interest rates are likely to remain on hold throughout this forecast period, with a rise expected towards the end.

The CBI forecasts 0.5% quarter-on-quarter GDP growth in the first three quarters of 2013, and 0.6% in the final quarter.

Ian McCafferty, CBI Chief Economic Adviser, said: "After a particularly difficult autumn which saw a contraction in growth in the fourth quarter, recent business survey data in manufacturing and professional services, has been more encouraging with an uptick in activity and improved business sentiment.

"While significant risks in the euro area remain, the ECB’s decision to inject more liquidity into the system has reduced the chance of a banking crisis.

"There are also tentative signs of a stabilisation in economic activity in the ‘core’ countries which account for a large proportion of UK exports."

(GK)