Economy bottoms out but growth must wait, says CBI

The group's boss Richard Lambert says he is unsure the 'green shoots have roots'

Britain's economy is finally stabilising, but the recovery will not properly begin until the beginning of next year, Britain's biggest employers' group warns today.

While other forecasters, including the National Institute of Economic and Social Research and the Chancellor of the Exchequer, are predicting an end to economic decline this quarter and a return to modest growth in the third quarter of the year, the CBI said today that it did not expect a pick-up to begin properly until the first three months of 2010.

Unlike more optimistic commentators, the CBI is now predicting minus 0.1 per cent GDP growth in the third quarter of this year, followed by 0 per cent in the final three months. It then predicts very modest growth in the first and second quarters of 2010, at 0.1 per cent and 0.3 per cent respectively.

Vince Cable, the Liberal Democrat Shadow Chancellor, said: "This report is a warning that ministers are probably being premature in telling us the economy is in recovery."

The forecast follows a warning last week from Richard Lambert, the director-general of the CBI, who urged politicians from all parties to "get a grip", to put squabbles aside and concentrate on getting the economy back in good shape.

Today, Mr Lambert said that while the latest data now suggested some bottoming out of the recession, obstacles remained in the way of a fully-fledged recovery.

"The return to growth is likely to be a slow and gradual one; difficult credit conditions are still affecting business behaviour. For positive growth to return, lenders need to feel more confident so that credit can start flowing again," Mr Lambert said.

"Some commentators have been carried away by recent tentative indicators as evidence of 'green shoots'. It will take some time before we can be sure these shoots have roots we can depend on for sustainable growth and, in the meantime, the Government must do everything it can to help firms get access to credit."

The CBI said that in addition to the action taken by the authorities, including interest rate cuts, the Bank of England's quantitative easing programme, and a fiscal stimulus, the flexibility of Britain's labour market was proving crucial in getting the economy through the worst of the downturn.

The employers' group pointed out that many companies had implemented part-time working, pay freezes and other tactics to avoid making staff unemployed and that this would help boost the confidence of consumers.

Nevertheless, the CBI predicts further declines in household consumption as unemployment rises, and expects business investment to fall back further.

"We still have some way to go before the UK economy is truly out of the woods and we see sustainable growth. For consumers, some of the worst fears of earlier in the year may now not be realised, but they will still face tough times as higher saving and lower income eat in to their ability to spend," said Ian McCafferty, the CBI's chief economic adviser.

"However, the restraint shown by businesses and their staff in setting pay awards and accepting short-time working should help to curb the pace of job losses, lessening the pain for some, and shows the real strength of Britain's flexible labour market."

The CBI is now predicting that the total decline in the economy will, peak to trough, come to 4.8 per cent, well below the 5.9 per cent fall seen in the recession of the early Eighties. However, while the Government will welcome that prognosis, the CBI's forecasts of a very modest and slow recovery put the employers group on a collision course with Alistair Darling, who has predicted a much stronger rebound.

The CBI's analysis of the current state of the British economy is supported by research published today by the accountancy firm Ernst & Young, which suggests that businesses now think the worst of the recession is behind them, but many are not convinced that the recovery is just around the corner.

When it surveyed businesses in January, it found four in five were primarily focused on restructuring, while seven in 10 were hoping simply to survive the recession. This month, those numbers have eased somewhat, while more than half of all companies are now beginning to focus on new opportunities, but around half of all businesses are still in retrenchment mode.

Scott Halliday, UK and Ireland country managing partner of Ernst & Young, said: "Many assets are at much lower prices than two years ago, which will bring opportunistic buyers to the table."