CBI reduces forecast for economic growth
The CBI has reduced its forecast for economic growth next year, saying high oil prices are likely to hit world demand and rising interest rates will make UK consumers less willing to spend.
Announcing the new figures, CBI Director-General, Digby Jones, urged the Bank of England to slacken the pace of interest rate rises, saying the MPC must not "overdo the rate rise medicine".
The CBI’s forecast assumes base interest rates will level out at 5.25% early in 2005. But Digby Jones warned that the risks and uncertainties surrounding this forecast are greater than usual, saying even this relatively low peak in base rates would be too high, if global or domestic demand were suddenly to deteriorate.
Publishing its quarterly economic forecast, the CBI predicted UK GDP growth will now average 3.4% in 2004 as a result of changes in the way that government sector output is measured.
The CBI expects reasonable but more moderate growth next year. The 3.0% expected in the previous forecast in May has now been downgraded to 2.8%.
That reflects a slower recovery in export growth than previously thought, as rising oil prices hit demand from industrialised countries, together with a clearer moderation in UK consumer spending growth than previously projected.
The CBI expects oil prices to fall next year from the current highs, but they will still be up on previous forecasts. Oil is forecast to average $36.6 a barrel this year and $31.3 in 2005. That compares with the $33.3 and $28.9 dollars a barrel forecast in May.
Export growth is now expected to be 1.8% in 2004 following the disappointing start to the year recorded by the official data. At 4.9% it will still be significantly higher in 2005, but not as strong as the 5.5% forecast three months ago.
CBI Director-General, Digby Jones, said, "The Bank of England must not overdo the rate rise medicine. After five increases since November this forecast suggests that, combined with the impact on demand of recent oil price rises, the prescription so far may be almost enough to do the trick.
"Consumers are becoming less willing to spend and more likely to save. Inflation is comfortably in check and global competition remains fierce.
"We’ve assumed that base rates level out at 5.25% next spring, but even that relatively low peak would be too high if demand at home or abroad suddenly took a turn for the worse. The Bank should not risk damaging the recovery by rushing to add to the range of cost pressures companies are facing.
"The current cycle could well mean interest rates peak at five per cent, a good outcome for business. Household consumption grew strongly during the first half of 2004 as house prices and wages rose, but rising interest rates are now slowing consumer demand. People will be increasingly likely to save rather than spend.”
The CBI has revised its forecast for household consumption down from 3.0 to 2.9% for this year and down from 2.6 to 2.3% for 2005. With consumers less keen to borrow, the household savings ratio for 2005 has been revised up from 5.7% to 6.3%. Unemployment is expected to increase very slightly next year, rising from 1.43 million this year to 1.45 million in 2005.
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