Page last updated at 10:23 GMT, Tuesday, 25 March 2008

CBI predicts even slower growth

Rising food and fuel prices will hit household spending, the CBI says

Employers' organisation the CBI is warning of slower economic growth as households tighten their belts due to higher food and fuel prices.

In its latest quarterly outlook, the CBI says the UK economy will grow at a slower than predicted rate of 1.8% this year, and by 1.7% in 2009.

This is gloomier than the chancellor's recent forecast of between 1.75% and 2.25% growth in 2008.

The CBI says the UK is experiencing "uncertain times".

"We are facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth," CBI director-general Richard Lambert said.

Outside the financial and property sectors, the mood of business is, however, nothing like as gloomy as you might guess from reading today's headlines
Richard Lambert, CBI

The business organisation also predicts inflation to rise more than expected, driven by higher food and energy prices.

It expects the consumer prices index measure of inflation to peak at 3.2% in the second half of 2008.

But the CBI said slower growth should bring inflation down, meaning the Bank of England will be able to cut interest rates.

The CBI predicts the Bank of England will cut interest rates twice this year, with a further reduction in 2009 bringing interest rates down to 4.5%.

Not all gloom

Economists have been predicting a more difficult time ahead, with the credit crisis, which has hit financial markets, making it more difficult for businesses and homebuyers to borrow money.

But the CBI warns that although these factors mean the economy is in for a "bumpier ride", after two years of strong growth many businesses say conditions are still good.

"Outside the financial and property sectors, the mood of business is, however, nothing like as gloomy as you might guess from reading today's headlines," Richard Lambert said.

And the UK manufacturing sector remains confident about the challenges ahead, according to the Engineering Employers Federation (EEF) business group.

It said that in 2007 UK manufacturers overcame a challenging economic environment thanks to its major restructuring efforts in recent years.

That, the group said, has enabled firms to survive in the face of increasing global competition.

A survey of 200 companies showed that an increasing focus on innovation, more sophisticated products and customer service was helping UK manufacturers to compete with low-cost rivals China and India - without having to cut prices.

"Instead of competing on price alone they are adopting a range of strategies to take advantage of emerging markets," the EEF said.

"While there are many other challenges on the horizon, manufacturers look well-placed to rise to them."

But, the EEF warned that "the credit crunch could have significant negative implications for UK manufacturing - if the underlying uncertainties continue for too long into 2008".

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