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UK has reached the steepest phase of the recession, says CBI

The UK has now seen the worst of the recession, according to the Confederation of British Industry (CBI).

The CBI said that although the recession deepened more than expected in the first three months of this year, it would be prove to be the worst of the quarterly falls in GDP.

The CBI is expecting the economy to moderate in the second half of 2009, but the recovery will be slow and fragile, with GDP growth resuming only in the spring of 2010.

Revealing its latest economic forecast, the CBI said that the world economy had worsened since its last forecast in February, with further falls in global industrial output and the financial crisis continuing to frustrate businesses and governments.

It has revised its GDP growth outlook for 2009 from -3.3% to -3.9%, reflecting a harsher quarter-on-quarter contraction of -1.8% for the first quarter (Q1) of 2009.

The UK's business organisation predicts however that, aided by aggressive monetary policy, a weaker pound, low inflation, and the fiscal support announced by many countries, the rate of UK GDP decline will slow through 2009 and make a fragile improvement to reach positive quarter-on-quarter growth of 0.2% in 2010 Q2.

Richard Lambert, CBI director-general, said: "The UK economy remains deeply troubled, and the first quarter of this year has been tougher than expected. Firms have been running down their stocks of completed goods, and that is having a real impact on output, jobs and investment. Anxious consumers are spending less and building a savings buffer.

"In these turbulent times it is difficult to build a clear picture of how the economy will perform, but there are a few tentative signs that the steepest phase of the recession is now behind us, and that the banking packages, aggressive monetary policy and fiscal support will steady the pace of decline from here on. The recession is by no means over, but we see a return to very weak growth by spring 2010.”

The CBI is asking that Alistair Darling does not introduce another financial stimulus package in his Budget this Wednesday due to “falling tax revenues and alarming levels of Government debt”.

The federation wants Budget measures targeted on jobs and investment, with a focus on efficiency savings and public service reform.

The CBI predicts that the economy will have shrunk by a total of 5.1% by the end of this recession, which is not as severe as the cumulative 5.9% seen in the early 1980s recession.

The recession is expected to last until the end of 2009, marking six consecutive quarterly falls in GDP. Sluggish growth will resume in 2010 Q2, picking up slowly over the course of the year, giving an annual average for 2010 as a whole of GDP growth of 0.1%.

CPI inflation is expected to fall below the Bank of England's 2% target in 2009 Q2 and to remain there through 2010.

The Bank of England is expected to start slowly increasing the UK official bank rate from its current 0.5% in spring 2010. However, the monetary stance will remain easy throughout the forecast period.

Unemployment is expected to continue to worsen over the next 12 months, breaking 10% in 2010 Q1 (10.1%) and peaking at 3.25 million unemployed (10.3%) in 2010 Q2.

Households, worried about the economy and jobs, lifted their savings ratio to a two-year high in 2008 Q4, and the CBI expects a broadly similar rate of saving to be sustained throughout 2009 and 2010. Household consumption is forecast to drop by 3.4% in 2009 and 0.4% in 2010. Low inflation and job concerns will keep average earnings growth weak throughout 2009.

Businesses will continue to scale back on investment in the face of the recession, and business investment is expected to shrink by 9.3% over 2009 and a further 3.4% in 2010.

The public finances remain under considerable pressure, and net borrowing in 2009/10 is expected to reach £157bn and £172bn in 2010/11, which would represent 11.2% and 11.9% of GDP respectively.


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