Rising commodity costs and weaker consumer demand will combine to push down next year’s GDP growth to the lowest rate since 1992, according to the CBI’s latest UK economic forecast.
The UK’s biggest employers’ group said today (Monday) that it has lowered its forecast for GDP growth in 2009, by 0.4% to 1.3%.
The forecast for growth in 2008 is essentially unchanged, at 1.7%, down only 0.1% on March's forecast.
The slowdown already underway in consumer spending is set to intensify, driving consumption growth down to only 0.7% in 2009 - the lowest since 1992 (0.5%).
At the same time as the economy slows, record high oil prices and steep increases in commodity costs are pushing inflation up. The CBI predicts that the CPI rate of inflation will exceed 3% for the remainder of 2008, peaking at 3.8% in the third quarter. The CBI expects it to remain above 3% until the end of the first quarter of 2009.
If that is the case, the Governor of the Bank of England, Mervyn King will have to write a total of four letters to the Chancellor to explain the overshoot in consumer inflation relative to its 2% target.
However the descent in inflation, starting later this year, will continue through 2009 - helped by a slowing economy, the fading impact of high oil prices and expected wage restraint. The high level of inflation in the short-term prevents the Bank from reducing rates for much of this year but, once the peak in inflation has passed and looking towards 2010, the CBI believes the Bank will have the flexibility to cut interest rates twice by the second quarter next year, to a level of 4.5%.
Richard Lambert, the CBI’s Director-General said: "Over the past year, the CBI has consistently had to revise down its forecasts for economic growth. The main reason is that the oil price - measured in depreciated sterling - has continued to rise strongly, roughly doubling since the spring of 2007. This has squeezed household incomes and companies' profit margins, and has also made it much harder for the Bank of England to cut interest rates in the face of the economic slowdown.
"Our best bet is still that there will be a measure of economic growth in 2009. But the outlook has deteriorated in recent months, and considerable uncertainties remain.
"That said it is important to remember this is not a forecast for recession. Back in the early 1990s, we had a prolonged period of plummeting consumer demand and there were large job cuts across the board.
"These days, firms are leaner and more efficient and our economy's reach is far more global. We should avoid believing a recession is inevitable, or talk ourselves into unnecessary trouble."
Export growth this year is expected to pick up in 2009, helped by the continued competitive value of the pound, while the weaker outlook for consumer demand and increased costs leads to comparatively subdued growth in imports. So, the CBI forecasts that net trade will improve, offering some support to the economy.
Households will see little or no growth in their disposable income, while savings rates will increase as consumers pay off credit and put more aside for the future. Growth in average earnings is likely to be contained, so should not add to inflationary pressure.
The forecast for investment has been downgraded considerably for this year and next, with near-flat growth of just 0.3% in both years, compared to 6.2% in 2007. This reflects more marked falls in residential investment than previously and a weaker outlook for business investment.
Ian McCafferty, the CBI’s Chief Economic Adviser said: "The twin effects of slowing demand and rising commodity prices provide a wind chill factor and will make things feel much less comfortable over the next two years.
"The impact of the credit crunch on economic activity is unravelling much as we had expected, with most firms so far relatively unaffected. Credit markets have been somewhat calmer in recent months, but if significant disruption were to erupt again, then we would see more problems ahead.
"Demand has already slowed this year and the extent to which consumers will rein in their spending will be felt most later this year, as they contend with the ongoing squeeze to real incomes and a weaker housing market. Growth should still pick up towards the end of next year but only at a gradual pace, so the economy will feel more sluggish than it has for many years."
Other key points of the economic forecast and report include:
| 2007 |  | 2008 | | 2009 | |
| Q1 | 2.8 | Q1 | 2.4 | Q1 | 3.1 |
| Q2 | 2.6 | Q2 | 3.1 | Q2 | 2.3 |
| Q3 | 1.8 | Q3 | 3.8 | Q3 | 2.1 |
| Q4 | 2.1 | Q4 | 3.4 | Q4 | 1.8 |
- Since the previous forecast, the 2008 unemployment figure has been revised up slightly to 1.67 million, and for 2009 to 1.79 million.
- With the poorer outlook for the economy in 2008 and 2009, the public finances are set to suffer further. On the basis of no further policy changes, the CBI estimates public borrowing will come in at £47.1 billion in 2008/9 and £47.8 billion in 2009/10.