A recession through the second half of 2008 means that growth in the economy in 2009 will be the lowest since 1992, the CBI said today.

In its latest economic forecast, the UK’s leading business organisation has cut its GDP growth predictions for both 2008 and 2009, reflecting the sharper-than-expected slowdown over the first half of this year and the impact of weak consumer demand, high energy and commodity prices and the enduring effects of the credit crunch.

The growth forecast for 2008 has been downgraded from 1.7% to 1.1%. It looks as though the UK is in the early stages of a technical recession, with output in the economy expected to shrink by 0.2% quarter-on-quarter between July and September, followed by a further 0.1% decline in the fourth quarter.

However, GDP should stabilise early in 2009 ahead of a gradual and growing recovery, with quarter-on-quarter GDP growth  eaching a near-trend rate of 0.6% by the end of next year. Nevertheless, for 2009 as a whole, the GDP growth forecast has been cut from 1.3% to 0.3%.

CPI inflation is forecast to peak at 4.8% this quarter, but thanks to an easing in commodity prices and the weaker economy, it is expected to fall back quite rapidly over 2009, reaching close to the Bank of England's 2% target by the fourth quarter (2.3%). Into 2010, there is a significant risk that inflation will undershoot the Bank's target.

Once the short-term inflationary pressures have peaked, the inflation outlook into 2010 will allow the Bank to make a series of rate cuts to bring the base rate down to 4.0% by next spring.

Richard Lambert, CBI Director-General, said:

"Over the past year our forecasts for economic growth have been shaved lower and lower as the UK economy continues to struggle with the twin impact of higher energy and commodity prices and the credit crunch. Growth in 2009 will be feeble at best.

"Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived. This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged.
The CBI believes that unemployment will break the two million mark in 2009, reaching 2.01 million and a jobless rate of 6.5%. Average earnings growth is expected to remain fairly subdued, which will aid the improving inflation outlook