–CBI Raises UK 2010 GDP Forecast to 1.6% From 1.3% in June
–CBI Cuts UK 2011 GDP Forecast to 2.0% From 2.5% in June

LONDON (MNI) – The Confederation of British Industry raised this
year’s growth forecast but cut next year’s to just 2.0%, suggesting the
economy will still be growing below trend in 2011.

The CBI, in its quarterly forecasts, said the cut in its 2011
growth projection reflects the likely impact of the government’s planned
fiscal tightening. The CBI GDP projections are now close to the average
of independent forecasters.

The CBI predicts the UK economy will grow by 1.6% this year, up
from 1.3% in its June forecasts, and by 2.0% next, down from 2.5% in
June – with growth below trend in both years.

The independent Office for Budget Responsibility, which produces
the forecasts to accompany the national budgets, puts the UK’s trend
rate of output growth at 2.35% through to the end of 2013.

The CBI’s growth forecasts are above the OBR’s for this year and
below it for next. The OBR, at the time of the June Budget, predicted
growth of 1.2% this year followed by 2.3% in 2011.

The average of independent forecasts in the Treasury’s compilation
is 1.5% for this year and 1.9% next, just a sliver below the CBI
projections.

The majority view on the Bank of England’s Monetary Policy
Committee is, as Governor Mervyn King said, that “pressure from the
persistent margin of spare capacity is likely to pull inflation below
the target for a period.”

Below trend growth is going to prolong that existence of spare
capacity.

The CBI raised its 2010 GDP forecast in light of the stronger than
expected 1.2% quarterly growth in Q2 but it expects this to fall back
sharply.

The CBI expects the economy to grow by just 0.3% in the third
quarter and 0.6% in the fourth, but says a double dip recession is
unlikely.

“The degree of uncertainty around the outlook remains high, but our
view is that the UK’s tentative recovery will be sustained, albeit with
weaker levels of growth,” Richard Lambert, CBI Director-General, said.

Although household spending is expected to receive a boost at the
end of the year, as consumers seek to avoid higher VAT in January,
growth in spending is forecast to be restrained next year.

The CBI forecasts consumer spending growth of 0.9% this year and
1.0% next, with spending rising at the end of this year ahead of the VAT
hike in January next year.

“While the outlook for growth in 2010 has been lifted slightly, due
to somewhat faster economic activity in the second quarter of the year,
the outlook for next year will be more restrained. The action to get the
public finances back onto a sustainable footing will no doubt temper the
recovery going into 2011,” Ian McCafferty, CBI chief economic adviser,
said.

Against this backdrop, the CBI does not expect the Bank of England
to start raising Bank Rate from its record low 0.5% until Spring 2011
with Bank Rate at 1.25% by the end of next year.

–London bureau: 44 20 7862 7491; email: drobinson@marketnews.com

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