Business mood 'darkens' as economy disappoints

The Confederation of British Industry (CBI) warns today that there is a "darkening mood" among British business people as they face up to years of lacklustre, disappointing and fragile economic growth.

The squeeze on household incomes and consumer spending has hit UK business confidence hard in recent weeks, as has talk about the Government's planned spending cuts and sovereign-debt crises in the eurozone and in the US.

Businesses remain nervous about spending an estimated £60bn cash pile on investment plans, and are instead waiting to see whether the current economic and political risks pass. Only exports were really identified by the CBI as a potentially strong source of growth – up by 7.7 per cent this year and set for a rise of 6.9 per cent in 2012.

In its latest economic forecasts, the CBI has cut its figure for this year from growth of 1.7 per cent to 1.3 per cent – the current consensus among independent economists. The Office for Budget Responsibility's prediction remains at 1.7 per cent.

The CBI expects some "bounce back" from the second quarter's disappointing growth rate of 0.2 per cent, so that growth in the autumn will edge up to 0.8 per cent before slipping back in the winter to 0.5 per cent.

It says unemployment will peak at 2.5 million next year, while inflation will go above 5 per cent this autumn and remain above the official 2 per cent target until the end of next year.

But the CBI says that the Government should not abandon its plans to cut the Budget deficit – nor should the Bank of England opt for a new round of quantitative easing when it announces its moves on monetary policy this Thursday. The CBI's chief economist, Ian McCafferty, said "QE2" would "spook the markets" and push interest rates up. John Cridland, the director-general of the CBI, said he had detected "an erosion in confidence". He said "the mood has darkened significantly in recent weeks" in his meetings with member firms.