CBI trims UK growth expectations

The CBI is predicting a slowdown in consumer spending

Higher oil prices and rising interest rates are likely to lead to a slowdown in spending on the UK High Street, business leaders have predicted.

The Confederation of British Industry said it was now reducing to 2.8% its forecast for economic growth in 2005.

The CBI said the Bank of England "must not overdo" interest rate rises as recent moves seem to be having the desired effect of calming the economy.

The group assumes interest rates will reach 5.25% by early next year.

The Bank of England should not raise rates above that figure, the CBI said in its quarterly economic forecast.

Rate rise medicine

"After five increases since November this forecast suggests that, combined with the impact on demand of recent oil price rises, the prescription so far may be almost enough to do the trick, " said CBI director general Digby Jones.

The CBI has downgraded its forecast for UK economic growth in 2005 to 2.8% from 3%.

The decision to change its outlook was sparked by rising oil prices.

Oil prices were expected to slip back and average $36.60 a barrel this year, but that was still higher than previous expectations of $33.30.

UK growth this year should be 3.4%, higher than previously thought, the CBI said.

And unemployment is expected to increase slightly in 2005, rising from 1.43 million this year to 1.45 million.

False dawn?

In a separate announcement, the CBI's monthly industrial trends survey found firms remain optimistic and expect to increase output over the next three months.

The survey found 21% of firms had order books above normal while 19% said they were below - a balance of plus 2%.

This was the best measure since February 1998, the CBI said, and was helped by stronger domestic and overseas demand.

But Paul Dales, UK economist at Capital Economics, said there was a "good chance" the survey will become less upbeat later in the year.

"Indeed, the strength of the survey seems a bit strange given the background of rising domestic interest rates, a strong sterling exchange rate and evidence that global activity may be easing," he said.