2009 to see slowest growth since '92

The economy will slow to its weakest growth rate in almost two decades next year, hit by rising oil and food prices and by feeble consumer demand, the country's leading employers' group said on Monday.

The Confederation of British Industry (CBI) lowered its forecast for 2009 gross domestic product (GDP) growth from 1.7 percent to 1.3 percent, the slowest pace since 1992 when the economy was starting to emerge from recession.

The CBI also trimmed its 2008 forecast to 1.7 percent from the 1.8 percent growth it had expected in March's estimates.

Consumer spending is also set to slow to 1992 lows next year, the report found, with growth down to just 0.7 percent - less than half 2008's forecast level - though inflation will remain above the 3-percent mark into 2009.

Pressures on growth are coming primarily from the banking and housing sectors, both directly hit by the credit crunch, and from pockets of the retail sector, including durable goods, where sales drop as fewer consumers move home.

The CBI said it had been forced to revise down its growth expectations as oil prices continued to squeeze household incomes and corporate profit margins - the same inflationary pressures that are making it harder for the Bank of England to cut borrowing costs to counter a slowing economy.

Every $10 rise in the oil price results in a quarter-point cut to the rate of consumer spending growth, it said.

"The profile still suggests the UK will avoid a recession - in the sense of two quarters of negative GDP growth - but it is a very prolonged period of very sluggish growth in prospect," Ian McCafferty, the CBI's chief economic adviser, said.

"The credit crunch is less a short, sharp shock and more a headwind that will remain for some time."

INFLATION BACK IN LINE

Inflation has become a key concern for the Bank of England, as commodity prices continue to soar, and the CBI said it also saw rising consumer price inflation (CPI) over the coming quarters, with the headline number above 3 percent - the current rate - until the end of the first quarter of 2009.

But after a peak at 3.8 percent in the third quarter, inflation is set to ease and will eventually undershoot rather than overshoot the Bank's 2 percent target, as price rises fail to feed through to wage inflation.

"One of the interesting points from conversations with members is how few signs of upward wage pressure there are out there," McCafferty said, adding employees were being held back by a weakening labour market from demanding higher wages.

"It suggests the risks of rising commodity and oil prices transmitting to secondary price inflation are limited at this stage."

Although markets are betting on a rise in interest rates as the Bank of England battles inflation, many economists argue the most likely direction will be down to stave off the risk of recession and a possible housing market crash.

The CBI said it saw at least two rate cuts, with a quarter-point cut at the "turn of the year" and a further move in the first months of 2009, as inflation begins to ease.

The CBI said export growth was expected to improve in 2009, helping offset weaker domestic demand and to improve net trade.