CBI in warning on ‘feeble’ growth

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The worst recession in almost 30 years has ended, but the prospects for growth next year will be “feeble” as the economy continues to feel the effects of the financial crisis and tight credit, according to the CBI.

After five quarters of contraction, the employers’ body believes that the economy will grow by 0.3 per cent this quarter and 0.4 per cent in the fourth quarter, bringing to an end the worst downturn since 1979-1981.

The total loss of output since the start of the recession totals 5.5 per cent – only slightly better than the 5.9 per cent decline seen in the early 1980s recession, according to the CBI’s latest economic forecasts.

But the organisation does not expect a robust recovery of the type frequently seen after a deep downturn, with the economy expected to grow by only 0.1 per cent in the first quarter next year, 0.3 per cent in the second and 0.9 per cent over the whole year.

The slow recovery is likely to come as last year’s cut in value added tax is reversed and following a temporary boost to growth as companies restock after running down their inventories, the CBI said, adding: “The outlook is improving as the UK draws strength from quantitative easing, a weak pound and a recovering global economy.”

But it cautioned that although “a recovery looks to be under way, with output starting to pick up from recent lows . . . growth prospects for the rest of 2010 remain feeble since there is no obvious source of robust demand growth to drive the economy forward, particularly given the lingering impact of the financial crisis and ongoing tight credit conditions”.

The employers’ group expects unemployment to peak at more than 3m in the middle of 2010 and predicts that low wages and job losses will damp consumer spending.

Fears over job security and economic outlook are likely to drive household savings as a share of disposable income up towards 6 per cent by the end of next year, from 3 per cent in the second quarter and a 50-year low of -0.8 per cent at the beginning of 2008, the organisation said.

After business investment shrank by the highest rate in 40 years in the second quarter, proving a main driver of the larger-than-expected contraction in the economy, the CBI expects further retrenchment ahead.

This year it sees business investment declining by nearly a fifth, while next year investment spending is expected to retrench by a further 5.7 per cent and to be “heavily constrained by fears of excess capacity and concern about the strength of future demand”.

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