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British living in uncertain times, economic forecast says

British people are living in “uncertain times”, amid a financial shock on a scale not experienced in recent times, a senior British economist said Tuesday.

Richard Lambert, Director-General of the Confederation of British Industry (CBI), made the comment while releasing his latest quarterly economic forecast. The CBI downgraded its 2008 outlook for UK’s annual GDP growth rate to 1.8%, down 0.2%. The forecast for 2009 has also been downgraded with only 1.7% GDP growth, much more pessimistic than the Chancellor’s forecast in the recent budget of between 2.25% to 2.75%, considering troubled credit markets, rising commodity prices and weakening demand. The biggest downward revision in the CBI’s forecast is household spending, as purchasing power is heavily squeezed by higher food and energy prices. Consumption is forecast to slow more sharply than previously thought, from a growth of 3.1% last year to just 1.6% this year. As the economy slows, inflation is due to rise. The CBI expects that the CPI (Consumer Price Index) rate of inflation will peak at3.2% in the Q3 of 2008, much higher than the previous forecast 2.7%. However, in the longer term, the slowing economy will bring down the inflation.

The CBI expects the Bank of England to be able to cut interest rates in the second and fourth quarters of this year, with one more reduction early next year. This will bring interest rates down to 4.5% by early 2009. The CBI’s forecast also has some good news for exporters. The forecast for UK’s net trade has improved for 2008 and 2009, with exports growing 3.8% this year and 5.5% the next, compared with imports growing at just 2.2% and 3.3% respectively. Lambert said that the United Kingdom’s good corporate balance sheets and flexible labor market are both positive forces for the economy to show modest growth this year and next, before starting a gradual recovery. (