CBI: 'Volatile' outlook

Friday, 31 December 2010 12:00 AM

Richard Lambert, CBI Director-General, set out his views on the outlook for 2011 in his New Year message:

"There are bumpy times ahead for businesses in Britain. Travelling around the country, I find that many people are positive about current trading conditions - but extremely uncertain about what the New Year might bring. And that's understandable, because the economic and political outlook both seem volatile over the short term.

"For a start, the pace of economic recovery could slow quite markedly in the first few months of 2011. The VAT increase will be taking effect, and the construction sector will start to feel the pain of public spending cuts. The positive impact of the inventory cycle may also start to wane, with companies having gone some way to refilling the stock pipelines that had been run down so sharply in the recession. For all these reasons, we think that the quarterly growth rate in the next three months could be down to as little as 0.2 per cent, compared with 0.7 per cent in the third quarter of 2010.

"That news will be published at what will be a sensitive time in political terms. Spring will bring local authority elections in England, national elections in Scotland and Wales, and the promised referendum on voting reform. At the same time, welfare cuts will be starting to bite.

"You can easily imagine the screaming news headlines: about the threat of a double-dip recession; about strains on the coalition government; about protests in the streets.

"All this will be playing out against the background of continuing turmoil in the Eurozone. The direct exposure of our banks to the most troubled countries is quite modest. But recovery prospects in the UK would certainly be damaged if the contagion were to spread across our major trading partners in the European Union.

"However, the latest CBI forecasts, which are pretty much in line with the consensus view, suggest that growth in private sector investment and trade will start to pick up in the second half of the year, and continue into 2012. That would bring GDP growth of 2 per cent in 2011 and 2.4 per cent the year after - not much to shout about, perhaps, at this stage of a recovery, but enough to keep unemployment under control and the public finances on track.

"This means that the CBI is not expecting a double-dip recession, or a dramatic surge in inflation and interest rates. And it is forecasting that overall employment at the end of 2012 will be higher than it is today, with growth in the private sector more than offsetting job losses among public sector employees.

"Business investment and trade will be the essential engines for growth and job creation in the next few years, and the good news here is that export orders are strengthening, and our surveys of investment intentions in both the manufacturing and services sector are also picking up sharply from a low base. After three years in which the emphasis has been heavily concentrated on cost cutting, business people are once more beginning to think about growth.

"It all comes down to confidence. Of course there are lots of risks and uncertainties ahead, especially in the next few months. But with company balance sheets in reasonable shape and interest rates staying low, 2011 could also be a year of opportunity.

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