"Fragile" recovery for UK economy forecast by CBI

The CBI has predicted that the UK economy will show a gradual improvement in 2010, but the economic recovery will be “fragile”.

The group believes that the end of the UK recession will end in the fourth quarter of 2009, with a boost to consumer spending coming in December, prior to VAT going back up to 17.5 per cent in January. Despite that, however, the forecast is the economy will have reached pre-recession levels even by the end of 2011. Its latest forecast for the peak of unemployment is 2.8 million – lower than its original prediction.

John Cridland, CBI deputy director general, said: “Although the first few months of 2010 will be difficult, growth will gradually pick up and increasing confidence and demand will lead the UK into a more positive 2011.

“Consumer spending looks to be slightly more resilient than we first thought, and a weaker pound will help to support export growth.

“However, the economy will be on a fragile path of very slow growth, as we continue to feel the lasting effects of the financial crisis.”

Some of the CBI’s forecasts:

• Annual growth of 1.2% in 2010, followed by growth of 2.5% in 2011.
• Wage growth will be constrained during 2009 and 2010, then average earnings will rise by 3.9% in 2011.
• UK interest rates to start rising in spring 2010, reaching 2% by the end of the year.
• Inflation (CPI) to rise sharply following the rise in VAT in January, before easing back and falling below the Bank of England's target rate of 2% in 2011.