Slow 2011 rebound says CBI

Posted on 9 Feb 2011 by The Manufacturer

The UK economy will grow at a sluggish 1.8% in 2011, far behind the expected levels in a normal recovery, with manufacturing a key driver, says CBI’s economic forecast.

Wage settlements, consumer confidence and household purchasing power will be under pressure as the UK economy lurches its way deeper into recovery territory rather than cantering briskly to the winning line.

But business investment and exports will grow as confidence in new order levels return, says the CBI’s quarterly forecast.

Economic growth for 2011 is revised down from a previous forecast of 2.0%, reflecting the impact of bad weather in December but suggesting that underlying growth may have been weaker than previously thought.

The fall is a direct impact of weak Q4 2010 data on GDP, said the CBI, and not a fundamental change in its outlook. “Everyone was surprised by how weak the data was in the last quarter,” said John Cridland, the CBI’s new director-general, who added that past experience of output lost to poor weather suggested a rebound in activity in the first quarter of 2011.

Higher than expected inflation, driven by higher commodity prices and the VAT rise, as well as low household spending power and public sector cuts will keep growth rates suppressed in 2011 below the economy’s long term average rate. Growth in earnings is expected to edge up from the historical lows seen in the past two years, but will remain modest.

Manufacturing – which recorded the fastest export growth since the mid-1990s in the last quarter – will continue the pattern it set in the last quarter of 2010, leading other sectors of the economy with solid growth expected through the year.

Manufacturing output is forecast to rise to 5.4% (12-month average) in 2011, and demand will largely come from exports, up 6.6% in 2011 and 7.8% in 2012, while domestic demand for goods is suppressed from lower household spending power and public sector cuts.

Faster growth of 2.3% is forecast for 2012 as the effect of the VAT increase, a key driver of inflation in 2011, will drop out of the calculation.

Inflation is expected to increase – the Consumer Price Index to a 12-month average of 3.9%, from 3.3% in 2011, and the Retail Price Index to 4.9% – from analysis of recent survey data on costs and prices from the CBI, ONS and the Office of Budget Responsibility. The OBR’s forecast of GDP growth in 2011 and 2012 was marginally higher than the CBI’s.

Consumer confidence will remain in check, the business group says, with spending power being eroded from above-target inflation, lacklustre wage growth and higher mortgage interest rates.

Higher unemployment and fiscal austerity measures will add to the sombre mood. “We forecast a modest rise in unemployment, but nowhere near the unemployment figures forecast at this stage in the recovery last year,” said Mr Cridland.

The CBI expects interest rates to rise modestly from Q2 2011 onwards, as monetary stimulus os gradually removed to minimise the risk of sustained above-target inflation. Mr McCafferty said while the CBI’s members were not keen on seeing rate rises, if it were to be an effective instrument to control rising inflation, its members would be willing to see a rise in rates.

Mr Cridland added that in an environment of global inflation, the BoE’s Monetary Policy Commission’s changes to rates have a reduced total effect.

Business will invest in 2011
The CBI is confident that business investment will prosper through 2011, following a large fall in borrowing during the recession that has created pent-up demand and, in some cases, available cash on balance sheets. “The substantial financial surplus being run by the corporate sector allows for the internal financing of investment and reduces the reliance on bank lending,” said CBI’s chief economist Ian McCafferty. “We are forecasting expansion [of investment] of around nine per cent in 2011 and eight per cent in 2012.”

Manufacturing will not be a disproportionate driver of economic growth in 2011, said Mr McCafferty, rather it will be a strong performer. Other sectors which have grown in recent months, such as construction as well as parts of retail, will support it.

The recovery’s momentum relies on the bedrock of SME companies taking advantage of growth opportunities throughout 2011. Asked what the CBI is urging the Government to do to allow SMEs to capitalise on these chances, Mr Cridland said it is lobbying the government to ease access to export credit insurance and to make best use of the Export Credits Guarantee Department.

“The trade white paper we’ll publish in March sets out the best role of the EGCD to assist companies with trade finance, who have few options other than bank support,” he said. “We have outlined to the Chancellor how these alternative methods of finance should all link up to assist SMEs to grow.”

Quarter-by-quarter growth in the UK in the next two years, says the CBI, is: 0.5%, 0.5% and 0.7% in 2011, and 0.5%, 0.6%, 0.7% and 0.7% in 2012.