Economics Editor Nevill Boyd Maunsell talks to the CBI on its views of the economy and whether Britain will enter recession
The CBI is challenging the City’s view that the Bank of England will have to raise interest rates later this year to contain inflation and predicts that fast-falling inflation will enable the Bank of England to start cutting the cost of borrowing next year.
The employers’ organisation expects Britain to escape a recession, but has sharply lowered its forecast for next year’s economic growth to 1.3 per cent, the lowest rate since 1992, the year the last recession ended.
For this year, the CBI has trimmed its prediction for growth by only a marginal 0.1 per cent to 1.7 per cent in its quarterly 1.7 per cent.
“The UK will avoid a recession,” said the CBI’s chief economic adviser Ian McCafferty, “but we face a very long period of very sluggish growth.”
Like other economists, he expects inflation to stay above three per cent for the rest of this year, peaking at 3.8 per cent in the third quarter.
That would force the Bank’s governor, Mervyn King, to write a total of four letters to Chancellor Alistair Darling explaining why the Bank has missed its two per cent target by more than a full percentage point.
Mr McCafferty sees “few signs of upward wage pressure” which the Bank fears to could convert the present spike in energy and food prices into a longer term inflationary spiral.
“There is a risk of inflation under-shooting (the Bank’s target) in 2010,” he said. “The Bank should not increase rates due to short-term pressure.”
The CBI stated: “The high level of inflation in the short term prevents the Bank from reducing rates for much of this year but, once the peak in inflation has passed and looking towards 2010, the CBI believes the Bank will have the flexibility to cut interest rates twice by the second quarter of next year to a level of 4.5 per cent.”
Richard Lambert, the CBI’s director general, stressed: “This is not a forecast for recession.
“Back in the early 1990s, we had a prolonged period of plummeting consumer demand and there were large job cuts across the board.
“These days, firms are leaner and more efficient and our economy’s reach is far more global. We should avoid believing a recession is inevitable, or talk ourselves into unnecessary trouble.”
The CBI expects this year’s growth in exports to quicken in 2009, helped by the more competitive value of the pound.
At the same time weaker consumer demand and higher costs should hold back the growth in imports to that trade overall should help support the economy.
“The twin effects of slowing demand and rising commodity prices provide a wind chill factor and will make things feel much less comfortable over the next two year,” Mr McCafferty added. “The impact of the credit crunch on economic activity is unravelling, with most firms so far relatively unaffected. Credit markets have been somewhat calmer in recent months, but if a significant disruption were to erupt again then we would see more problems ahead.”