Europe Economy

UK Recovery Slower Than Expected: CBI

The UK economy will grow slower in 2011 than previously anticipated – 1.3 percent, compared to forecasts of 1.7 percent – and its 2012 growth will be a "modest" 2.2 percent, according to the Confederation of British Industry (CBI), an influential business organization.

Sharon Lorimer

Global conditions, including the sovereign debt crisis in the euro zone and the Japanese tsunami, hit growth in the first half of the year, according to official figures released by the Office of National Statistics on July 26.

Inflation will also rise above expectations over the autumn, according to the CBI's forecast. Even so, the Bank of England is expected to hold rates at their current historic lows until 2012 at least, due to the reduced growth forecasts.

For this reason, the Bank of England should be cautious when considering another round of quantitative easing, CBI director John Cridland told CNBC in an interview.

"The judgement has to be: will the second half of this year pick up, or is this 0.2 as good as it gets? We believe that it will get a bit better. Not spectacularly, but a bit better," Cridland said.

"If the economy is going to pick up, then there's no good reason for more QE (quantitative easing) today, because it does have an impact on inflation, which we need to keep an eye on as well. But in three months' time, when we see whether or not the economy has picked up, the [Monetary Policy Committee of the Bank of England] should keep QE on the agenda."

Cridland also said that the government should not, as some commentators have suggested, pull back on proposed tax reforms, which are designed to reduce headline rates and simplify structures for foreign investors.

"Let's remember, Mother Hubbard's cupboard is rather empty. The government hasn't got the financial wherewithal to make major giveaways or major changes to tax rates," Cridland said. "We've been very clear that the journey on bringing business taxes down, which the Chancellor has already started on, is an important one and will ultimately deliver extra revenues for the Exchequer, because a more dynamic economy delivers more tax.

Businesses' investment intentions have been dampened by the economic uncertainty, despite a "substantial" cash surplus in the corporate sector, the CBI said, forecasting a growth of 4 percent in investments in 2011, followed by 9 percent growth in 2012.

The competitive strength of the pound and the potential for some global economic improvement should lead to export growth picking up through the second half of the year and into 2012, and import growth is likely to be held back by weak domestic demand, the CBI said.

Cridland defended the private sector's role in job creation, despite the unemployment rate remaining high, at 7.7 percent.

"Even though a lot of people have lost their jobs, fewer of them have lost their jobs than would normally have done in a recession as deep as the one we went through. We have created half a million jobs in the private sector in the last year alone," Cridland said.

"The problem of public sector job cuts is a significant one, but it's perfectly possible for the private sector to take those jobs up," he said.

He added that the private sector is unlikely to see the same level of industrial action that has dogged the public sector. On June 30, several hundred thousand civil servants went on strike over proposed pension reforms.

"The private sector and their workforces – mainly de-unionized – are engaging with each other and conscious of the need to protect jobs by not putting them at risk through strike action. We look at the public sector and we see a different world," Cridland said.

Commenting on the CBI figures, Nick Carn, founder of Carn Macro Advisors, told CNBC that while UK growth was weaker than expectations, it is not dramatically underperforming relative to the rest of the developed world.

"The UK has had a relatively successful devaluation, there has been some rebalancing of the economy away from domestic consumption towards exports," he said. "There has been some move in the direction of constraining the growth in the public sector. It's more talked about than done, but at least the direction of travel is broadly correct."