CBI: Growth in 2011 will be "anaemic and sluggish"

The coalition has so far refused to budge on its position that the spending cuts introduced in June's Emergency Budget were absolutely vital to address the UK's public deficit. This gaping hole in the public finances, the government argues, poses the greatest threat to recovery, and immediate action to plug it was needed.

Labour, on the other hand, maintains that cuts were made too soon, risking at best derailing the recovery, and at worst plunging the economy back into recession.

Which side is in the right remains to be seen, but the latest GDP figures from the Office for National Statistics have certainly caused some concern among economists. While they were expecting December's snow to have an impact on GDP, output fell unexpectedly sharply by 0.5% in the fourth quarter of 2010 - the biggest drop in over a year - compared with an increase of 0.7% in the previous quarter.

What's more, this morning the Confederation of British Industry (CBI) revised its economic growth forecast for this year to 1.8%, from an "already sluggish" 2.0%. The business group also predicted that unemployment will continue to rise throughout 2011, peaking higher than previously forecast at 2.71 million.

However, the CBI believes the UK economy is "still on the road to recovery", and John Cridland, CBI director general, said the organisation still expects growth this year, "albeit rather anaemic and sluggish".

"With household spending under some considerable strain, we will be looking to business investment and exports to help deliver economic growth over the coming two years," he added.

But while the CBI does not foresee a double-dip recession, Ian McCafferty, CBI chief economic adviser, added that "growth at this stage is far less robust than we would normally expect for the second and third year of an economic recovery".

Moreover, weak consumer demand remains a serious issue. The latest retail sales monitor, published yesterday by the British Retail Consortium (BRC) and KPMG, stressed that although retail sales were up 2.3% on a like-for-like basis compared to January 2010, this was not as promising as it first seemed.

"On the surface, this is the best sales growth since last March, but that's not the whole story," said Stephen Robertson, director general of the BRC. The results compared to a particularly dismal, "snow-hit" January 2010, he said, while pent-up demand following the snow in December 2010, a last-minute dash to beat the VAT rise and the January sales gave a short-lived boost to non-food sales at the start of the month.

But sales soon fell back again, "as the reality of worries about jobs and personal finances returned to consumers' minds".

Next month's Budget (on Wednesday 23 March) is likely to have a crucial impact on consumer confidence, and Robertson urged the government to think carefully about further cuts. "Turning round consumer confidence is central to turning round the economy," he argued. "A range of pressures is bearing down on consumers. As it considers the Budget, the government must not add any more."

Consumers are certainly feeling the heat. The retail index came hot on the heels of the latest insolvency figures: more than 135,000 people in England and Wales were declared insolvent during 2010 - the highest level since records began in 1960 - with a further 140,000 expected this year. Insolvency practitioners warned that the UK faces a "perfect storm" as consumers struggled to manage debts amid rising unemployment.

Although the number of companies going into liquidation fell to its lowest level in two and a half years in the final quarter of 2010, experts also warned that weak consumer demand, rising inflation (which the CBI predicts will hit 4% this year, well above the government's target of 2%), and subsequent interest rate rises could lead to more business failures this year.

It's a precarious time for consumer demand to plummet further. Next month's Budget is a vital opportunity to ensure this doesn't happen, and increase support for entrepreneurs, who the CBI expects to deliver any real economic growth we'll see this year. Let's hope the chancellor makes the most of it - even if this does require a bit of a rethink.

Where do you stand on the chancellor's austerity measures? Were the cuts necessary and aptly timed or too deep, too soon? Or, how could the government best help your business in next month's Budget? Let us know below.

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