This forecast is contained in CEBR's latest forecast update, in the December 2000 issue of CEBR Quarterly Business Forecasts.
The economy is forecast to slow, with GDP growth slowing down from 2.8 per cent in 2000 (reduced by 0.2% as a result of the fuel dispute, floods and transport delays) to 2.3% on the government's measure in 2001 and 2.2% in 2002. (But the CEBR believe that official UK figures underestimate rates of growth of GDP by failing to measure the IT sector accurately).
Because of the slower growth and weaker world commodity prices, the forecasts suggest that inflation is likely to rise more gently during 2001, though it is expected to rise above the MPC's 2.5% target during the second half of the year.
CEBR have revised down their forecast for base rates, which are now expected to edge down by 0.25% in early 2001 before rising again as the world economy stabilises in the second half of the year. CEBR forecasts that base rates will rise to 6.5% in 2002 as a falling pound and recovering world economy boosts inflation.
The pound is forecast to fall by 13% against the euro over the period to 2004, but a weakening dollar means that the£/$ rate will remain more or less flat.
The current account deficit is forecast to grow to£19 billion by 2002 because UK growth is likely to continue to attract imports while exports will be hampered by plant closures and weak world demand.
Douglas McWilliams, chief executive of CEBR, points out: 'This year has been hit by the fuel dispute in September, floods and rail chaos. So we have revised our forecast for growth down to 2.8%.
'Our forecast for next year has not changed much since we forecast a slowdown in our last forecast, though we suspect that with world growth slightly weaker than we expected, commodity and oil prices will fall back and so UK inflation could stay low until the third quarter of 2001.
'But part of the slowdown is the government's own making. We are now expecting an under-spend of£7bn on public services this year, particularly for investment. As a result, the economy will stay growing more sluggishly than necessary, although interest rates may now fall temporarily in the coming months.'