No real recovery until 2010, but economy now more stable

The UK economy is stabilising, with the worst of the quarterly falls in GDP behind us, but it will take until the beginning of next year before we see a return to growth, according to the CBI. The UKs leading business group expects modest growth to resume during the first three months of 2010, with the pace of growth gradually picking up during next year.

The CBI predicts that UK GDP, supported by low interest rates and quantitative easing, should flatten out during the second half of 2009, with quarter-on-quarter figures of -0.1% and 0% in Q3 and Q4, and modest quarter-on-quarter growth of 0.1% and 0.3% in Q1 and Q2 of 2010.

Richard Lambert, CBI Director-General said: "The world recession has deepened, so it is not surprising that the UK economy has continued to suffer. However, the harshest period of the recession looks to be behind us, the economy is stabilising and this should continue during the second half of this year. The return to growth is likely to be a slow and gradual one; difficult credit conditions are still affecting business behaviour. For positive growth to return, lenders need to feel more confident so that credit can start flowing again. Some commentators have been carried away by recent tentative indicators as evidence of green shoots. It will take some time before we can be sure these shoots have roots we can depend on for sustainable growth and, in the meantime, the government must do everything it can to help firms get access to credit."

The CBI expects that, by the end of the recession, the economy will have shrunk by a cumulative 4.8% - not as severe as the 5.9% seen in the early 1980s - after five consecutive quarters of falling GDP. The CBI expects there to be very slight growth from the start of 2010, with the pace picking up slowly, such that trend growth rates are restored only by the end of the year. For 2010 as a whole, this profile yields an average annual GDP growth of a modest 0.7%. This follows a fall this year in GDP of 3.9%.

CPI inflation is expected to fall below the Bank of Englands target of 2% in 2009 Q3 and remain there throughout the forecast period to the end of 2010. Quantitative easing is expected to continue for some months yet, but by the spring of next year, the Bank is expected to wish to return monetary policy gradually towards a more normal footing, with very modest increases in the official rate of interest from its current 0.5%.

Significantly, the labour market is proving to be even more flexible than hoped, with many more private sector employees accepting wage freezes and short-time working than in previous downturns. This should help limit the pace of job losses through 2009, and the CBI now expects unemployment to peak at a slightly lower level than previously thought. Unemployment is still expected to continue to rise until Q2 2010, to a peak of 3.03 million (9.6%), before edging lower during the remainder of 2010.

Consumer spending will be constrained not only by the rise in unemployment, but also a more elevated savings ratio and only modest increases in incomes. Through 2009 and 2010, the savings ratio is forecast to remain at a similar level to the two-year high of Q4 2008. Meanwhile, average earnings (including bonuses) should continue to fall on a year ago during Q2 and Q3 2009, followed by weak growth from Q4 and into 2010.

As a result, the CBIs figures show household consumption shrinking by 2.9% in 2009, and growing only modestly in 2010 (0.5%).

The weakness of construction investment over the early part of 2009 has led to a modest revision in the outlook for business investment. Business investment is expected to shrink by 12.4% this year, from the -9.3% expected in April, and by a further 1.4% in 2010. Whereas firms have reduced their stock at a rapid pace at the start of this year, this should now begin to ease and firms should start re-building their stocks next year.

The public finances are expected to be under growing pressure from the recession and net borrowing is expected to reach 172.3 billion in 2009/10 and 182.2 billion in 2010/11, representing 12.2% and 12.6% of GDP respectively.

Ian McCafferty, CBI Chief Economic Adviser, said:  "We still have some way to go before the UK economy is truly out of the woods and we see sustainable growth. For consumers, some of the worst fears of earlier in the year may now not be realised, but they will still face tough times as higher saving and lower income eat in to their ability to spend. However, the restraint shown by businesses and their staff in setting pay awards and accepting short-time working should help to curb the pace of job losses, lessening the pain for some, and shows the real strength of Britain's flexible labour market."