Low interest rates and export spike 'will help UK avoid the double dip'

Record low interest rates, a recovery in export trade and a pick-up in business investment will help the UK economy avoid a "double-dip" recession, a respected think tank says today.

• Mervyn King (photo credit: Getty)

Issuing fresh GDP growth estimates, the Centre for Economics and Business Research (CEBR) also warns that employment growth is unlikely to resume until 2013.

Its forecast for sluggish growth of 1.2 per cent in 2010 matches the Office for Budget Responsibility's estimate.

While the CEBR's 1.6 per cent prediction for each of the following three years lags the new fiscal watchdog's own forecasts, economists at the think-tank believe that a double dip is "unlikely".

The author of today's report believes sustained low interest rates - which have remained at an historic low of 0.5 per cent for 16 consecutive months - will prevent the economy from tripping up again.

CEBR managing economist Charles Davis said: "What none of the commentators seem properly to have factored in is that we are likely to live in a world of very low interest rates for the near future.

"This should in turn boost values of equities and property and lead to higher expenditure towards the middle of the decade."

Today's research comes in the wake of fresh inflation data, showing a further easing in consumer price growth last month.

News of a dip in the main CPI (consumer prices index) measure of inflation to 3.2 per cent from 3.4 per cent in May is likely to soothe some concerns among inflation watchers and Bank of England governor Mervyn King.

Clothing and footwear prices fell by 2.1 per cent - the biggest reduction seen in June since the Office for National Statistics began collecting monthly figures 14 years ago.

There was also a fall in petrol prices during June compared with a hike a year earlier.

The retail prices index, which is frequently used as a wage bargaining tool in pay talks, fell to a 5 per cent annual rate from 5.1 per cent a month earlier.

Central bank forecasts have CPI gradually falling back towards a 2 per cent target later this year as the economic slack built up by a record recession drags down prices.

However, recent rate-setting meetings have seen heated debates.

The Bank has left monetary policy unchanged since last November, with interest rates pegged at 0.5 per cent and 200 billion in cash pumped into the economy through quantitative easing.

Andrew Sentance is the only member of the Bank's monetary policy committee to have voted for an interest rate rise at the Bank's last monthly meeting.

One black mark in yesterday's inflation report was a rise in "core" inflation, which strips out volatile factors such as food and petrol.

That nudged up to 3.1 per cent from 2.9 per cent over the month.

Vicky Redwood, economist at research consultancy Capital Economics, said the "nightmare scenario" of tax rises accompanied by rising interest rates should be avoided.

She added: "The further fall in headline inflation in June suggests that there is still little pressing need for an interest rate rise."

Howard Archer, chief UK economist at IHS Global Insight, said: "We forecast the first rise in interest rates to come in the second quarter of 2011, with rates only reaching 1.75 per cent by the end of 2011."

CEBR's Davis added: "We see a recovery in exports and business investment, the latter led by software but with commercial property following behind.".