UK economy is expected to contract by 3.3 % and unemployment to reach close to 2.9m by the end of the year, says CBI

The rapidly deteriorating global economy and the continued difficulties UK businesses are facing in accessing credit will push the economy deeper into recession in 2009, according to the CBI.

The CBI published its latest economic forecast and warned of a worsening international backdrop.

Last month the International Monetary Fund revised its forecast for world economic growth sharply downwards, and recent economic data have dashed hopes that growth in the emerging economies would soften the impact of the global downturn.

The UK business group predicted the recession, which began in the third quarter of 2008, will last throughout 2009. The economy is expected to contract by 3.3 % and unemployment will reach close to 2.9m by the end of the year.

However, during the second half of the year the impact of interest rate cuts, falling inflation, the relative weakness of Sterling, plus the fiscal boost, should start to have a stabilising effect, said the CBI.

After six quarters of negative growth, the economy is expected to stabilise early next year with the recovery building throughout 2010.

Richard Lambert, Director-General of the CBI, said: ‘Faced with a global confidence crisis, a rapid fall in demand and credit constraints, UK firms have been forced to scale back investment and cut jobs.’

‘The outlook remains extremely uncertain so forecasting remains especially difficult. Ultimately the severity of this recession will depend on the speedy implementation of the Government’s measures to unblock the credit markets and the success of various global stimuli packages in repairing business and consumer confidence.’

The CBI predicts the economy will contract by a cumulative 4.5 % over the six quarters of negative growth. GDP growth for 2009 has been revised down from

-1.7 % in November to -3.3 %. In 2010, GDP growth is expected to be 0.0 %.

In 2010, inflation will remain under the Bank of England’s two per cent target. Nominal interest rates are expected to stay at a very low level until the end of 2010.

As the recession deepens, unemployment is expected to rise sharply over the course of 2009. The CBI predicts unemployment will peak at just over 3m (9.6 %) in the second quarter of 2010.

Consumers worried about losing their jobs will be spending less and saving more, dampening household spending. The CBI expects household consumption to contract by 2.7 % in 2009.

Businesses will continue to scale back on investment sharply throughout the year. Business investment is expected to shrink by 9.2 % in 2009 and 1.7 % in 2010.

The impact of the recession and the fiscal stimulus will take a toll on the public finances with net borrowing for 2009/10 expected to reach £149bn and £168bn in 2010/11, which represent 10.6 % and 11.8 % of GDP respectively.

Ian McCafferty, CBI Chief Economic Advisor, said: ‘The crisis of confidence caused by last October’s financial turmoil resulted in a sharp and sudden fall in global output, including across the emerging economies.’

‘Given the rapid contraction in global economic activity, and the continuing credit squeeze, we believe the UK will be mired in a deep recession for the whole of 2009, lasting six quarters in total and accompanied by a significant rise in unemployment.’

‘The most urgent requirement is to get the various credit support schemes, announced recently, underway. Faced with continued uncertainty about access to credit, firms will continue to take drastic action to protect their businesses. But if we can get credit flowing across the economy, the considerable monetary and fiscal stimuli already in the pipeline should start to feed through later in the year and provide the pre-conditions for an eventual recovery through 2010.’