Bloomberg News

U.K. Recovery to Stall as Euro Crisis Persists, CBI Forecasts

November 09, 2011

Nov. 9 (Bloomberg) -- Britain’s recovery will stall this quarter and 2012 growth will be about half the pace previously forecast as the euro-area crisis clouds the export and investment outlook, the Confederation of British Industry said.

The economy will expand 0.9 percent this year and 1.2 percent in 2012, compared with previous forecasts for growth of 1.3 percent and 2.2 percent, the London-based business lobby said in a report today. It also cut its projections for euro- area and global growth.

“The outlook for the U.K., as we look into 2012, is critically dependent on the outcome of the turmoil in the euro zone,” said Ian McCafferty, chief economic adviser at the CBI, told a press conference in London yesterday. “The risk of a double-dip has certainly risen” though it isn’t the group’s central forecast, he said.

Britain’s recovery is struggling to build momentum as inflation at a three-year high and the government’s fiscal squeeze undermine consumer confidence. At the same time, Europe’s debt crisis is damping demand in Britain’s biggest trading partner. The Bank of England expanded its bond-purchase target to 275 billion pounds ($442 billion) last month and will probably keep it at that level this week, economists forecast.

U.K. growth will be flat in the fourth quarter and accelerate to 0.2 percent in the first three months of the year, the CBI said. The group sees the euro region slipping back into a recession and failing to grow in 2012. Global expansion will be 3.5 percent in 2012, the CBI said, cutting a previous forecast of 4.5 percent.

Government Plans

The CBI urged the government to stick to its deficit- reduction plan, which has resulted in the deepest fiscal squeeze since World War II and been criticized by the opposition Labour Party for stifling the recovery.

“I don’t think that spending money we don’t have is an option,” CBI Director-General John Cridland told reporters.

He also said that the continuing debt crisis in the euro area, which has spread from Greece to Italy, makes it even more important for the U.K. to maintain its top credit rating. In an open letter to Chancellor of the Exchequer George Osborne, the CBI said the government could help the economy by doing more to boost private investment in infrastructure such as roads and energy networks.

All 38 economists in a Bloomberg News survey forecast that the Bank of England will keep the target for its asset purchases unchanged on Nov. 10. The central bank will also hold its key interest rate at a record-low 0.5 percent, according to a separate poll. The CBI said it doesn’t expect the bank to add to its bond purchases.

“Difficult pressure on households will lift as we go through the next year,” McCafferty said.

--Editors: Fergal O’Brien, Eddie Buckle

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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