UK ‘to avoid another recession’ but CBI slashes growth forecasts

Leading business body the CBI has slashed its growth forecasts for the UK again – but said it believes the economy will avoid another recession.

In its latest forecast, the CBI said it expects GDP to increase just 0.9 per cent, down from the 1.2 per cent growth it predicted in November.

Its prediction for 2013 was also lowered to a modest 2 per cent from 2.2 per ncet.

Although growth will remain subdued and conditions tough, it thinks the UK will avoid an official recession - two quarters of declines in a row - as it bounces back from its 0.2 oer cebt fall in the final quarter of 2011 with growth of 0.2 per ecnt in the first three months of this year.

And households suffering their longest squeeze in living standards for a generation will receive some much needed relief as the consumer prices index (CPI) rate of inflation continues to fall from its 5.2 per cent peak in September.

Inflation is expected to drop to 2.2 per cent in the final quarter of the year and will remain close to the Bank of England’s 2 per cent target throughout 2013.

However, with unemployment rising to 2.9 million in the first quarter of 2013 - higher than its previous estimate of 2.75 million - wage growth is set to remain modest.

Nonetheless, the falling inflation will allow consumer spending to pick up slightly in the second half of the year.

The CBI thinks that as the economic recovery continues, the Bank of England will hike interest rates from their record low of 0.5 per cent in the final quarter of 2013 but expects no further emergency quantitative easing to inject cash into the economy.

CBI director general John Cridland 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.

“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.”

The CBI downgraded its forecasts after “a particularly difficult autumn” but has been encouraged by increasingly upbeat recent industry surveys and business optimism.

It predicts growth will gather pace in the second half of the year, hitting 0.6 per cent in the third quarter but will remain fragile with high levels of uncertainty driven by the eurozone crisis.

However, the CBI has been encouraged by efforts by the European Central Bank to inject more cash into the economy, reducing the risk of a banking crisis.

It said there are signs the core eurozone countries are seeing signs of stabilisation, which will help boost UK exports.