Business 'faces difficult year'

The CBI expects the UK economy to grow by 2% in 2008

British business faces a tough year as it grapples with the global credit crunch and rising food and energy costs, business group CBI has warned.

Richard Lambert, director-general of the Confederation of British Industry, also said that the balance of economic power was shifting to India and China.

But despite these "big challenges", the UK economy would likely have a soft landing as growth slowed, he said.

He also called on the government not to increase public spending.

As oil prices rise closer to $100 a barrel, Mr Lambert said rising food and energy costs would put pressure on companies' profit margins, and limit the ability of central banks to cut interest rates.

In a New Year message he said the fallout from the credit crunch, which was caused by problems in the US housing market, would pose particular difficulties for the UK because the financial sector represents nearly a tenth of the economy.

But recent weakness in the pound, together with the UK's flexible labour market, should allow the country's businesses to weather a slowdown in growth, he said.

The CBI recently forecast that the UK economy would grow by around 2% in 2008, and roughly the same again in 2009.