The CBI has downgraded its forecast for UK growth in 2008 for the third quarter running, due to continuing credit market difficulties and record oil price rises, allied to weaker domestic and global demand.
In its latest quarterly economic forecast, published today (Monday), the business group puts next year's annual rate of GDP growth at 2.0%, down 0.2% on September’s figure.
Consumer confidence has already weakened due to the ongoing problems in the financial markets and the continuing high energy and petrol costs.
Consumer spending is expected to slow more sharply than previous thought, with growth falling from 3.1% this year to 1.9% in the next. The rate of increase in real household incomes is expected to pick up modestly following weaker growth in 2007, however, offering some support to consumer spending.
The CBI forecasts slower growth in investment next year (1.8%, down from 5.7% this year), led by modest falls in property-related expenditure following strong growth this year. The outlook for other business investment remains relatively healthy, however.
Although growth in the world's advanced economies will slow slightly next year, the continued robust growth of emerging economies and expected depreciation of the pound will help support export markets and shore up the UK's economic prospects.
Meanwhile, inflation will rise during 2008 due to the higher price of oil, gas and food. The CBI forecasts it will reach a peak of around 2.6% towards the end of the year, after which it should fall back to around the target rate of 2.0% by the end of 2009.
Having made a 0.25% cut to interest rates this month, the Bank is expected to make a further cut some time in the New Year to keep medium-term inflation at about target rate. If credit or economic conditions were to deteriorate further, however, the CBI says a third cut may still be necessary next year.
Ian McCafferty, the CBI’s Chief Economic Adviser, said: “Whilst the 2008 slowdown may appear dramatic set against this year’s strong growth, the fundamentals of our economy remain sound and talk of a full blown recession is overstated.
“Uncertainty surrounds the extent to which current credit conditions will affect both business and consumer confidence and how far the property markets will suffer. Borrowing conditions are already tighter for some households and businesses.
“Another key factor is the price of oil, which has risen by 20 per cent since September. A prolonged period of high oil prices will add to inflationary pressures, whilst putting a squeeze on profits and discretionary spending, compounding the slowdown.
“This all makes for an incredibly challenging year for the Bank. It has to keep a very careful eye on rising prices for commodities such as oil, gas and food as well as consumers' inflation expectations, whilst ensuring monetary policy doesn't unnecessarily impact on an already slowing economy.”
Other key points of the economic forecast and report include:
- RPI inflation, which is used as a basis for wage settlements, is expected to come down somewhat more than CPI, due to lower house price inflation and falling interest rates. The RPI rate of inflation is forecast to slow from 4.3% this year to 3.6% in 2008.
- The savings ratio is expected to pick up next year, as households increase precautionary savings during a time of uncertainty. The ratio is forecast to increase from 3.3% this year to 4.3% in the next.
- Average earnings growth is forecast to remain at 4.0% next year before weakening slightly to 3.9% in 2009.
- Whereas unemployment was previously forecast to fall in 2008, it is now predicted to rise to 1.70 million next year and 1.75 million in 2009, due to slower economic growth.