CBI drops growth forecast to reflect economic conditions

Growth will return to the UK economy towards the end of 2012, and 'pick up a little pace' during 2013, according to the Confederation of British Industry's latest quarterly economic forecast.

The organisation is predicting GDP growth in 2012 to be -0.3%, somewhat shy of its previous forecast in May of +0.6%. This reflects a more negative first half-year and a slower rate of growth in the second half than was expected in May.

It now expects an uplift in GDP growth in late 2012, with a bounce-back from the Jubilee effect and a fall in inflation. In the third quarter of 2012, quarter-on-quarter growth is expected to be +0.6%, followed by +0.2% in the final three months.

Looking forward to 2013, the CBI forecasts GDP growth of +1.2%, revised down from its previous forecast of +2%, reflecting a smaller contribution from net trade, given a weaker rate of global growth than previously forecast. It adds the risks for such a prediction, 'are on the downside given on-going global uncertainty'.

John Cridland, CBI Director-General, said: 'At present I believe the economy is flat rather than falling but, nonetheless, momentum seems to have weakened and the latest official figures put the UK in recession for the second quarter of this year.

'Underlying growth will return to the economy later in the year than previously expected, with a somewhat better outlook next year.

'However, euro area uncertainty, and the looming 'fiscal cliff' of spending cuts and tax increases in the US will only add to the sense of unease during the coming months.'

It found that heavy discounting by retailers and a sharp fall in world commodity prices has led to a faster-than-expected drop in the rate of inflation. Combined with weak wage growth, inflation is expected to fall further by the end of the year, and should remain close to the Bank of England's 2% target throughout 2013.

The rapid fall in inflation means the pressure on household spending is easing faster than previously thought, despite wage growth remaining weak. During 2013, real disposable incomes should begin to rise again, for the first time since 2010. This should give something of a modest boost to consumer spending, although households are likely to remain cautious given the relatively weak labour market.

The CBI said it does not expect unemployment to increase by as much as previously thought, peaking at 2.7m in mid-2013.

With high levels of uncertainty persisting in the economy, growth in business investment is expected to remain modest, at around 5% this year and 3.8% in 2013.

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