CBI cuts growth forecast to reflect weaker economic conditions

Growth should return to the UK economy towards the end of the year, and pick up a little pace during 2013, according to the CBI’s latest quarterly economic forecast.

The CBI is forecasting GDP growth in 2012 to be -0.3 percent, below its previous forecast in May of +0.6 percent. This reflects a more negative first half-year and a more modest rate of growth in the second half than was expected in May.

The CBI expects some improvement in GDP growth late in 2012, 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 percent, followed by +0.2 percent in the final three months.

In 2013, the CBI forecasts GDP growth of +1.2 percent, revised down from its previous forecast of + two percent, 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.

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 back a little further by the end of the year, and should remain close to the Bank of England’s two percent 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 does not expect unemployment to increase by as much as previously thought, peaking at 2.7 million in mid-2013.

Difficult conditions in the global economy, particularly 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 percent), followed by an increase next year (3.5 percent), with demand from faster-growing, emerging markets likely to provide some support.

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