The UK economy will grow just 0.2 per cent in the first quarter of 2011, as Government job cuts and higher-than-expected inflation slow the recovery.
Industry body CBI downgraded its forecast for quarterly growth in the first three months of the year from 0.3 per cent, but said it did not expect the UK to fall back into recession.
The growth should gather pace to 0.4 per cent in the second quarter and 0.5 per cent for each of the third and fourth quarters, giving a 2 per cent annual growth rate for the year.
The CBI also made its first estimate for gross domestic product (GDP) growth in 2012, which it expects to be 2.4 per cent, which it said was slower than usual for the third year of a recovery from recession.
The UK’s economy has shown strong growth in 2010, with quarterly GDP having grown 0.4 per cent, 1.2 per cent and 0.8 per cent in the first three quarters, and expected to grow by 0.5 per cent in the fourth quarter.
The sluggish growth in the first quarter of 2011 will be caused by consumers reacting to the increase in VAT from 17.5 per cent to 20 per cent on January 4 and by the Government making redundancies.
The CBI expects inflation to be higher than forecast throughout 2011, as energy and commodity prices remain high and push up household bills.
Consumer price inflation (CPI) will remain above the Bank of England’s (BoE) 2 per cent target for the whole of 2011 and will dip below target at the start of 2012 before finishing 2012 at 2.4 per cent, according to the the CBI’s forecast.
Inflation has already been above 2 per cent for 12 months in a row and is currently at 3.3 per cent.
The continued high inflation next year will force the BoE to gradually raise interest rates in the spring and the base rate will hit 2.75 per cent by the final quarter of 2012.
CBI chief economic adviser Ian McCafferty said: “Quarterly growth at the start of 2011 is likely to be very sluggish, although we do expect the recovery itself to stay on track.
“What is striking is how little we see growth accelerating in 2012. Typically, by the third year of a recovery, growth would be more robust than we expect for either 2011 or 2012.”
Unemployment is also expected to grow in 2011, peaking at 2.6 million at the end of the year. The jobless rate will not drop below 2.5 million until the fourth quarter of 2012, as the labour market remains subdued.
The growth in people’s pay, which has been muted for the past two years, is expected to gain momentum in 2011 and 2012.
But pay rises will not keep pace with inflation and as a result household disposable incomes are expected to drop, and with it household spending.
“Growth prospects for consumer spending look pretty subdued over the next couple of years,” added Mr McCafferty.
“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.”