CBI warns UK faces bleak year ahead

By Hugo Duncan for the Daily Mail
Updated: 19:39 EST, 8 February 2011

Britain faces a year of ' stubbornly high' inflation and 'anaemic and sluggish' economic growth, business leaders warn today.

Inflation will hover around 4 per cent - double the 2 per cent target  - in 2011 having been at 3 per cent or higher for the whole of 2010, according to the CBI.

At the same time, the recovery will be slower than expected with economic growth of just 1.8 per cent this year and 2.3 per cent next year.

That is less than the 2 per cent and 2.4 per cent growth rates the CBI predicted in December and the 2.1 per cent and 2.6 per cent pencilled in by the Treasury.

But in a boost to ministers and the Bank of England, the CBI reckons there will be no doubledip recession and inflation will fall back to the 2 per cent target in 2012.

Today's report comes as the Bank's monetary policy committee meets to thrash out how to restore the British economy to health.

Economists believe there is a 40 per cent chance the Bank will raise interest rates when the meeting ends at noon tomorrow to put a lid on rising prices.

That would be a bitter blow for millions of borrowers but good news for Britain's army of savers who have lost out since rates hit a record low of 0.5 per cent in March 2009.

Howard Archer, chief UK economist at IHS Global Insight, said: 'The MPC is negotiating a tortuous path between high and rising inflation on one side and faltering economic activity on the other.'

The CBI report predicts rates will start rising 'in the spring' and will reach 1.25 per cent by the end of this year and 2.75 per cent by the end of 2012.

Unemployment is expected to peak at 2.71million this year, up from the 2.58 per cent forecast in December.

Ian McCafferty, the CBI's chief economic advisor, said: 'The economic outlook remains subdued and conditions for the consumer will be tough for some time to come. But the economy will grow in the coming two years and we do not foresee a double- dip recession.

'Persistently high levels of inflation are a concern. This makes it more likely that the Bank will need to start putting up interest rates from the second quarter of this year.'

Strong export growth will be one of the keys to a decent recovery, according to the CBI. The British Chambers of Commerce urged ministers to do more to help firms sell goods overseas.

'Too many of our companies lack an exporting culture, even though they produce high-quality goods and services,' said BCC director general David Frost.

'Our survey reveals some uncomfortable truths for British business and for the Government about our ability to export.'