The Confederation of British Industry has predicted that the UK economy will grow by 2% in 2011 and 2.4% in 2012.
Despite a sluggish start to 2011 – with growth in the first quarter predicted to be just 0.2% quarter on quarter – because of the effect the VAT hike will have on spending, the CBI has said that the risk of a double-dip recession is low. Steady but fairly modest growth of 0.4%, 0.5% and 0.5% is predicted over the remaining quarters of 2011.
Quarterly growth rates are expected to pick up a bit more momentum during 2012, with the economy forecast to expand by 2.4% over the year as a whole – which is rather subdued for this stage of a recovery.
The CBI expects inflation throughout 2011 to be higher than previously forecast – reflecting greater inflationary pressure from energy and commodity prices.Consumer price inde inflation will significantly exceed the Bank of England’s 2% target in 2011 for a second year, mainly because of the impact of higher VAT. This upward push to inflation will end by the first quarter of 2012, when inflation is forecast to dip just below target before ending the year at 2.4%.
The CBI predicts that the Bank will start to normalise monetary policy in the spring, with interest rates rising gently through to mid-2012, followed by a slightly faster monetary stimulus withdrawal over the second half of 2012. This will take the Bank of England base interest rate up to 2.75% by the fourth quarter of 2012.
Ian McCafferty, CBI chief economic adviser, said: “The pace of recovery in the UK economy has been slightly stronger over the past year than we and many others had expected, and somewhat faster than typical during the first year out of a recession. But we do not expect that rapid pace of growth to continue over the next two years of recovery. The big early kicker to growth from the turn in the inventory cycle has already passed and we are now starting to feel the impact of lower government spending. As a result, quarterly growth at the start of 2011 is likely to be very sluggish, although we do expect the recovery itself to stay on track.
“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.
"The persistent strength of energy and commodity prices is a growing concern, as it is likely to mean that 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.”