The CBI sliced back its forecast for the growth of the British economy this year to
1.9 per cent, lower than at any time since the last recession was on the turn in 1992.
This is a marked downrating from the earlier 2.5 per cent and a still sharper contrast with the three to 3.5 per cent forecast by Gordon Brown in his March Budget - a prediction that the Chancellor is expected to re-visit in his pre-Budget statement in November or December.
The employers' organisation stressed that its adjustment arose from downward revisions in official estimates for growth in the first half of this year rather than a changed view of prospects for the remaining months of 2005.
"The recently revised ( National Statistics) data highlighted the loss of momentum in the economy since 2004 and the CBI forecast shows momentum being rebuilt only gradually," Ian McCafferty, the CBI's chief economist, explained.
"As a result, this year's rather modest growth of 1.9 per cent should be enough to hold off inflation in the face of high oil prices."
He suggested that Mr Brown may have succeeded in avoiding tax increases next year by the Treasury's controversial reassessment of the date when the present economic cycle began. By moving it back to 1997 it included years when the Government had a surplus of some £9 billion on its budget, which Mr Brown says should balance over the cycle.
Mr McCafferty commented: "The Government's ability to meet its 'golden rule' for public sector borrowing in the current economic cycle was greatly improved by its recent decision to begin the cycle in 1997, but this does not change the fact that the next cycle is set to begin on a poor footing."
For next year, the CBI forecasts that growth will pick up to 2.2 per cent, responding to favourable economic conditions round the world, while oil prices ease back a little.
The new forecast assumes that the Bank of England keeps its official interest rate at 4.5 per cent. But because inflationary pressure is expected to ease off next year, while the economy is still growing below the long-term trend, the CBI said a further cut in the cost of borrowing cannot be ruled out.
"The forecast for a modest recovery next year is based partly on the view that world economic conditions will remain benign," Mr McCafferty said.
"But with the growth of consumer demand set to remain sluggish by the standards of recent years, the UK economy is clearly vulnerable, should global conditions take a turn for the worse."
The CBI expects inflation to remain above the Bank's two per cent target in the near term.
Consumer demand will be held back by the reluctance of private individuals to borrow money to fund their spending.
Business investment will be subdued as profit margins are squeezed by high energy and commodity prices. ..SUPL:
