Recession will be over early 2010

Light at the end of the tunnel

The UK’s economy may be stabilising but people shouldn’t expect a recovery until the beginning of next year, the country’s leading business organisation has claimed.

The Confederation of British Industry (CBI) has forecast “modest growth” in the first three months of 2010, with the economy remaining flat until then. It also believes that unemployment will peak at 3.03 million – slightly lower that previously thought – at the start of 2010 before falling during the remainder of the year.

Richard Lambert, director-general of the CBI, says the fact that the global recession has deepened rules out an immediate recovery of the UK’s economy.

But he adds: “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.”

Lambert says lenders need to feel more confident about the outlook because “difficult credit conditions” are still restricting economic growth.

In recent weeks, several sets of positive economic data – including signs that the housing market is stabilising – have led to claims that the green shoots of recovery are with us. Last week, the National Institute of Economic and Social Research claimed the recession was over and estimated economic growth resumed in April and May.

But Lambert is not convinced – and warned commentators not to get carried away and confuse “tentative indictors” for 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," he explains.

Overall, the CBI expects the UK’s economy to shrink by 4.8%. In comparison, the recession in the early 1980s caused contraction of 5.9%. The organisation predicts GDP (the measure of economic heath) to be between -0.1% and 0% in quarter three and four of this year, improving to between 0.1% and 0.3% in the first six months of 2010.

While the pace of growth will pick up during the second half of next year, the CBI expects this to be slow. For 2010 as a whole, it forecasts annual GDP of just 0.7%.

If this prediction is accurate, then consumers should be prepared for a period of low inflation. The CBI says the cost of living will fall below the Bank of England’s 2% target at some before September, remaining at this level until the end of 2010. As a result, the official rate of interest is also set to remain low for some time, although it is likely to increase slightly from the current rate of just 0.5%.

A positive note from the CBI’s report relates to the labour market, which the organisation claiming this is proving to be “even more flexible than hoped”. Unlike previous downturns, where companies made mass redundancies, the CBI says this time round private sector employees are more open to wage freezes and short-time working. This should help limit the pace of job losses through 2009, it says.

However, with the threat of redundancy still haunting many households, consumer spending is expected to remain constrained, with people more inclined to save than spend.


Ian McCafferty, chief economic adviser at the CBI, says: "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.”

Other CBI predictions:

* Unemployment will rise until the second quarter of 2010 - to a peak of 3.03 million - before edging lower during the remainder of 2010

* Average earnings (including bonuses) will continue to fall on a year ago before resuming “weak growth” during the last four months of 2009 and into 2010

* Household consumption to shrink by 2.9% in 2009, with modest growth of 0.5% in 2010

* Business investment to shrink by 12.4% in 2009 (revised from -9.3% expected in April) and by a further 1.4% in 2010

* Public finances are expected to be under growing pressure from the recession; net borrowing will reach £172.3 billion in 2009/10 and £182.2 billion in 2010/11, representing 12.2% and 12.6% of GDP respectively