More pain to come but end is in sight

Published on Sunday 19 April 2009 20:55

BRITAIN has seen the worst of the recession, but there will be no recovery until the spring of 2010, the CBI has warned.

Revealing its latest economic forecast yesterday, the CBI said a harsher first quarter of 2009 than expected had led it to cut its economic growth forecast for this year to minus 3.9 per cent from minus 3.3 per cent. That followed a quarter-on-quarter contraction of minus 1.8 per cent in the first three months of this year.

Richard Lambert, CBI director-general, said: "It (Q1] has turned out to be worse than we thought it would be. There have been further falls in output worldwide, steep falls."

A key theme was major "destocking" by businesses of completed goods – impacting output, jobs and investment, Lambert said. "There has also been weakness in domestic consumption as families tighten their belts."

The CBI said there were tentative signs that "the steepest phase of the recession is now behind us", and that the banking rescue packages and serial interest rate cuts would steady the pace of decline from here on.

Lambert said: "The recession is by no means over, but we see a return to very weak growth by spring 2010." He added that "2010 to us looks like a fragile year" and that only "a modest pick-up" could be expected.

Painting a depressing picture even after the recession, the CBI said it expected economic growth next year of just 0.1 per cent, with the first growth quarter being Q2.

Britain's biggest business organisation warned that it expected unemployment to hit 10.1 per cent in the first quarter of next year, and peak at 3.25 million (10.3 per cent) in the second quarter of 2010.

The CBI's forecasts came as the Ernst & Young ITEM Club also forecast that "a recovery next spring is now the most likely scenario".

Peter Spencer, chief economic adviser to the ITEM Club, said: "Although one or two positive signs have started to appear, we face another 12-18 months of serious grief. Around 900,000 jobs will be lost this year and 500,000 the next. Consumption will fall by nearly 4 per cent over this period as people worry about job security."

The CBI predicts that the economy will have shrunk by a total of 5.1 per cent by the end of this recession. This compares with a cumulative 5.9 per cent contraction in the early 1980s recession.

Ian McCafferty, chief economic adviser to the CBI, said the early 1980s recession was made worse by the simultaneous significant restructuring of British industry away from heavy manufacturing towards a light manufacturing and services economy.

That added depressant factor was not present this time round, he said. However, McCafferty added that it was clearly "the worst contraction in the global economy since the Second World War".

He also said the CBI's members felt they were in "uncharted territory" in terms of the impact and timing of the Bank of England's policy of "quantitative easing" – essentially printing money to help get the economy moving again.

Meanwhile, Lambert renewed the organisation's call for the Chancellor to avoid any further fiscal boosts in his Budget on Wednesday "given falling tax revenues, the shrinking economy, and alarming levels of government debt".

• A leading City economics consultancy says the credit crunch and resulting economic crisis cost the wholesale financial sector 28,000 jobs last year.

However, CEBR says it has downgraded its forecast of further wholesale financial sector job losses in 2009 to 29,000 from 34,000 because of "the unexpected speed with which the financial crisis has turned the corner".

Dougie Adams, economic adviser to the E&Y Scottish ITEM club, said: "While Scotland has so far dodged the worst of the fallout in the labour market, there is little hope of avoiding a sharp fall in employment and consequent rise in unemployment over the next two years."