Monday, December 20, 2010

CBI sees high prices, low growth and rising rates for 2011

CBI sees high prices, low growth and rising rates for 2011 ; CBI employers' body predicts inflation will force Bank of England to raise base rates earlier than expected, while higher tax deters consumer spending and stalls economy , The economy will come to a virtual standstill in the next three months as higher tax deters consumer spending, while inflation will be driven higher by energy prices, the CBI employers' body predicts today.

Downgrading its quarterly growth forecast for the first three months of 2011 from 0.3% to 0.2%, the CBI also made its first prediction for 2012, when it expects a slower pace of growth than is usual for an economy pulling out of recession.

It also predicts that a rise in inflation – which has already breached the targeted 2% for 12 months in a row – could force base rates to begin to rise off their historically low levels by the end of the second quarter of next year.

Gross domestic product will be 2.4% in 2012, according to the CBI, which described that rate of growth as "rather subdued for this stage of a recovery".

Ian McCafferty, chief economic adviser at the CBI, said: "What is striking is how little we see growth accelerating in 2012. Typically, by the third year of a recovery, growth would be more robust than we expect for either 2011 or 2012.

"Growth prospects for consumer spending look pretty subdued over the next couple of years. Real take-home pay will be hit further next year; unemployment is not expected to fall very quickly in 2012, and households will most likely face higher mortgage interest rates," he said. The CBI stressed that it did not expect the UK to slide into a double-dip recession after achieving growth in 2010 of 0.4%, 1.2% and 0.8% in the first three quarters. Fourth-quarter GDP is expected to grow by 0.5%. The CBI then expects economic growth to slow again in the first quarter of 2011 – by 0.2% and then rise in subsequent quarters of the year by 0.4%, 0.5% and 0.5%.

While growth stalls, inflation is predicted to rise by more than expected, which is also leading the employers' body to predict the Bank of England to "normalise monetary policy in the spring".

Interest rates will rise from their historically low 0.5% gradually through 2011 to mid-2012 with base rates reaching 2.75% by the fourth quarter of 2012, the CBI said. "The persistent strength of energy and commodity prices is a growing concern, as it is likely to mean inflation does not fall back quite as sharply as many hope. This makes it more likely that the Bank of England will need to start pulling back from record low interest rates earlier, rather than later, next year," McCafferty said.

The first quarter of 2011 will be characterised by consumers reacting to the rise in VAT from 17.5% to 20% on 4 January and by the cuts to public-sector jobs that the government has warned are needed to deal with the budget deficit. Unemployment is expected to rise in 2011, to reach 2.6 million later in the year.
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