CBI cuts economic growth forecast

The drop in UK consumer confidence and fears over sovereign debt in the eurozone and the United States have stoked a downturn in business optimism.

CBI economists have now cut their gross domestic product (GDP) forecast for the year to 1.3 per cent from 1.7 per cent, having already trimmed their estimate from 1.8 per cent in May.

Concerns over economic growth make it almost certain that the Bank of England's monetary policy committee will keep interest rates on hold at a record low of 0.5 per cent when it meets this week.

GDP growth of 2.2 per cent is expected in 2012, the CBI said, unchanged from May's forecast.

John Cridland, the CBI's director-general, cited political events such as the American debt crisis and the eurozone's continuing woes for undermining business confidence.

The growth forecast cut also follows second-quarter UK GDP expansion coming in at just 0.2 per cent, compared with a CBI forecast in January of 0.8 per cent for the quarter.

Cridland said the second quarter had been hit by special factors such as the squeeze on electrocomponent supplies following the Japanese tsunami and the long bank holiday period connected with the Royal Wedding.

But he warned: "There has been a marked softening in activity. The mood of CBI members has darkened significantly over recent weeks."

Cridland said measures agreed in the eurozone to prop up fragile economies such as Greece had helped business sentiment, but there was still no comprehensive solution to "draw a line" under the continent's problems.

The CBI said some members had re-appraised their investment strategies because of the uncertain economic and political outlook.

Cridland added: "We don't believe the economy has stalled. But the rest of the year will be tougher than we thought."

The CBI said it expected export growth to pick up, reflecting the depreciation of sterling, while imports are expected to be muted because of subdued domestic demand. Exports growth of 7.7 per cent is expected in 2011 and 6.9 per cent in 2012.

Interest rates are likely to be kept on hold by the Bank of England until the first quarter of 2012, said the business trade body. It had previously forecast a 0.25 per cent rise from historic lows of 0.5 per cent in the third quarter of 2011.

Ian McCafferty, CBI chief economic adviser, said: "Economic conditions will be very tough for the rest of this year as household budgets continue to be squeezed by a combination of inflation and weak wage growth."

The CBI forecasts that consumer expenditure will fall by about 1 per cent this year.

McCafferty said this indicated how particularly slow businesses felt the UK recovery would be. By this time in the up-turns from the 1980s and 1990s recessions, household expenditure had "recovered nearly all it had lost," he said.

By contrast, he added that he felt this time it would be "a subdued recovery for some time to come, two, three or four years".

Howard Archer, chief UK and European economist at IHS Global Insight, expects this week's purchasing managers' indices to show the economy made a "sluggish start to the third quarter".

And Archer also warned: "Manufacturers are finding life more challenging as domestic demand is held back by serious headwinds, notably including tightening fiscal policy and a major squeeze on consumers, while recent slower global growth is dampening export orders."