Despite many risks to the outlook, and a forecast of particularly fragile growth at the beginning of 2011, the UK recovery is expected to be maintained and the CBI still considers the risk of a double dip back into recession to be low.
The pace of recovery is expected to slow to a very sluggish rate of only 0.2% quarter-on-quarter in Q1 2011, when consumer spending falls slightly in response to higher VAT. Steady but fairly modest growth of 0.4%, 0.5% and 0.5% is predicted over the remaining quarters of 2011.
Quarterly growth rates are expected to pick up a bit more momentum during 2012, with the economy forecast to expand by 2.4% over the year as a whole, which is rather subdued for this stage of a recovery.
The CBI expects inflation throughout 2011 to be higher than previously forecast, reflecting greater inflationary pressure from energy and commodity prices. CPI inflation will significantly exceed the Bank of England's 2% target in 2011 for a second year, mainly due to the impact of higher VAT. This upward push to inflation will end by Q1 2012, when inflation is forecast to dip just below target before ending the year at 2.4%.
The business group therefore predicts that the Bank will start to normalise monetary policy in the spring, with interest rates rising gently through to mid-2012, followed by a slightly faster monetary stimulus withdrawal over the second half of 2012. This will take the Bank Rate up to 2.75% by Q4 2012.
Ian McCafferty, CBI chief economic adviser, said: "The pace of recovery in the UK economy has been slightly stronger over the past year than we and many others had expected, and somewhat faster than typical during the first year out of a recession. But we do not expect that rapid pace of growth to continue over the next two years of recovery.
"The big early kicker to growth from the turn in the inventory cycle has already passed and we are now starting to feel the impact of lower government spending.
"As a result, 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.”
