Weak trading means CBI cuts growth forecast

Posted on 31 Aug 2012

Modest growth should return to the UK economy towards the end of the year as inflation falls, and will pick up pace during 2013, according to the CBI’s latest forecast.

GDP growth in 2012 is forecast to be -0.3%, below its previous forecast in May of +0.6%, the CBI’s quarterly economic survey forecasts.

Released Thursday, the survey reflects a more negative first half-year and a more modest rate of growth in the second half than was expected in May.

The business group expects some improvement in growth later this year, with a bounce back from the Jubilee effect and inflation falling a little further. 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.

In 2013, the CBI forecasts GDP growth of +1.2%, revised down from its previous forecast of +2%, mainly reflecting a smaller contribution from net trade, given a weaker rate of global growth than previously forecast. But the risks for this forecast are on the downside given on-going global uncertainty.

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 back a little 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.

The CBI says that in 2013 real disposable incomes should begin to rise again, for the first time since 2010, which should provide “a modest boost” to consumer spending, although households are likely to remain cautious given the  weak labour market.

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

Growth in business investment is expected to remain modest, at around 5% this year and 3.8% in 2013, as uncertainty throughout the economy persists.

Difficult conditions in the global economy, particularly in the eurozone and the US, mean export growth is likely to be weaker than was forecast in May.

The CBI expects a small contraction this year (-0.4%), followed by an increase next year (3.5%), with demand from faster-growing, emerging markets likely to provide some support.

“While we expect GDP to rise in the third quarter as the Jubilee effect unwinds, our survey data indicate that underlying conditions are close to flat, so the economy is likely to remain quite listless through the remaining months of 2012,” said Anna Leach, CBI head of economic analysis. “On a more positive note, we expect the pressure on household incomes to continue to lift through the remainder of this year, as inflation falls further, and this should put the recovery on a slightly firmer footing next year.”