Two years of pain as CBI forecast lower growth for the UK

Business students don’t really need to know the detailed reasons why the rate of economic growth varies. However, they should appreciate the longer-term trends in GDP growth rates and understand the main implications for businesses.

So today’s news from the Confederation of British Industry would make really useful reading for any students preparing for AS & A2 business exams in May & June 2008. The outlook for economic growth in the UK economy is worsening according to their latest forecast.

So, what are the numbers?

The CBI said it had downgraded its 2008 economic growth forecast for the UK from 2% to 1.8%, and was pencilling in an even weaker 2009 after cutting its growth forecast from 2.1% to 1.7%.

It added that consumer spending was likely to be even weaker than the overall growth rate of the economy, expanding by 1.6% this year and 1.1% next. The CBI expects a rebalancing of growth away from consumer spending and towards exports, helped by the weakness in the pound.

According to the CBI’s forecasts, the consumer prices index (CPI) measure of the cost of living will peak at 3.2% in the second quarter of this year, requiring the Governor of the Bank of England, Mervyn King to write a letter to Alistair Darling, the chancellor, explaining why inflation has risen more than a percentage point above its target. At the time of its last forecast late last year, the CBI was expecting inflation to peak at 2.7%.

The CBI said it expected the base interest rate (determined by the Bank of England’s Monetary Policy Committee) - currently 5.25% - to be cut to 5% this spring, and has pencilled in two similar reductions in the final quarter of 2008 and the first quarter of 2009.

So the figures don’t yet point to an official recession, but they do suggest tough times ahead for business - particularly those that are reliant on strong consumer spending to generate sales.