The UK’s economy is set to grow more slowly than previously thought as higher-than-expected inflation squeezes household spending power, a leading business body has warned.
The CBI predicted that GDP will rise by 1.7% in 2011 and 2.2% the following year. This marks a downward revision from its previous forecast in February which expected an increase of 1.8% and 2.3% respectively.
Higher prices, rising unemployment and the government’s austerity cuts have left the UK’s economy far less robust than would normally be expected in a recovery, it said.
GDP grew by 0.5% in the first quarter of 2011, after a 0.5% slump in the previous quarter, meaning that the economy has effectively been at a standstill in recent months. The CBI said growth for the rest of 2011 will be patchy and slow.
CBI director-general John Cridland warned: “The rebalancing of the economy is going to take time to feed through, and domestically it may not feel like much of a recovery for some time yet.”
The rising cost of oil and other commodities is expected to drive inflation higher than previously forecast, causing more misery for cash-strapped consumers, whose wages are failing to keep up with price rises.
The business body now predicts that the consumer prices index (CPI) will average 4.2% in 2011, up from 3.9% in its previous estimate. But it thinks CPI will begin to fall back towards its 2% target next year as the impact of January’s hike in VAT to 20% wears off.
The sluggish nature of the recovery means interest rates are now unlikely to rise until the third quarter of 2011, whereas a hike had been expected in the second quarter.
CBI chief economic adviser Ian McCafferty said: “The recovery continues to be choppy and lacking in vigour.
“What remains striking is how little we expect the pace of growth to accelerate in 2012, and that it will be far less robust than we’d normally expect in the second and third years of a recovery.
“Of particular concern are rising commodity prices, which are putting more intense upward pressure on inflation.”
However, the CBI’s predictions for unemployment are slightly more optimistic than before. Jobless numbers are expected to peak at 2.6m in the final quarter of 2011, although they will remain “stubbornly high” in 2012.
And the UK is set to benefit from strong demand for exports as global economic conditions remain upbeat and the pound stays depressed against other currencies.