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CBI revised its forecast for the economy to grow by 1.7% this year and 2.2% in 2012, from 1.8% and 2.3% forecast in February
The economy will grow less strongly than first predicted, the CBI warns today, even as signs emerge of a revival in high street spending.
Employers group the CBI revised its forecast for the economy to grow by 1.7% this year and 2.2% in 2012, from the 1.8% and 2.3% forecast in February, citing squeezed household budgets, subdued wage rises and public spending cuts.
A prolonged period of slow growth will also push up unemployment by another 100,000 by the end of the year before gently falling back, the CBI said. Its latest quarterly forecasts came as accountancy firm BDO's high street sales tracker showed a rise in April sales of 3.7% helped by the warm weather over two public holidays.
A separate survey by BDO shows that inflationary expectations have reached a 29-month high – but that weak growth prospects should ensure the Bank of England holds interest rates at the historically low 0.5% in the coming months.
Ian McCafferty, the CBI's chief economics adviser, said the UK would avoid a double-dip recession and was markedly more upbeat than some recent reports from analysts that have painted an even more gloomy picture of the UK's growth rate over the next two years.
McCafferty said: "The recovery continues to be choppy and lacking in vigour. Expansion in certain sectors is being offset by weaker performance in others. What remains striking is how little we expect the pace of growth to accelerate in 2012, and that it will be far less robust than we'd normally expect in the second and third years of a recovery."
Weak areas of the economy, including construction and services, will be offset by continued strength in exports and business investment, he said.
CBI director general John Cridland warned that volatile oil prices and the impact of the earthquake in Japan on UK supplies to domestic factories remained factors that could restrain growth.
The CBI is among the more optimistic forecasters along with the government's own fiscal watchdog, the Office for Budget Responsibility.
Earlier this week the National Institute of Economic & Social Research said growth would struggle to reach 1.4% in 2011 and 2% in 2012. It said weak growth and the government's five-year squeeze on consumer spending would hit tax revenues and lead to the government missing its debt repayment targets.
Some analysts have gone further and highlighted the risk of slipping back into recession after the UK posted a 0.5% contraction in the last quarter of 2010 and a week return to growth in the first quarter of this year. The Office for National Statistics said the UK had failed to grow over the last nine months.
The CBI said inflation is anticipated to be higher throughout this year and into early 2012 than previously forecast, largely due to the effect of higher commodity prices.
It agreed with NIESR that as the impact of the VAT rise falls away, inflation will to fall back closer to the Bank of England's 2% target rate next year.
"Nevertheless, with inflation expectations edging upwards, the Bank is expected to begin the process of normalising monetary policy later this year. Modest interest rate rises are likely from Q3 2011 through to mid-2012, followed by a slightly faster monetary stimulus withdrawal over the second half of 2012. This would take the Bank rate up to 2.5% by Q4 2012," the report said.