ALISTAIR Darling's growth forecasts for the UK economy come under fresh pressure today as Britain's leading business body radically reduces its expansion outlook for this year and next.
The CBI said the economy was set to grow by just 1.8 per cent in 2008, down from its previous forecast of 2 per cent, and by as little as 1.7 per cent in 2009.
The figures compare with the 1.75 to 2.25 per cent and 2.25 to 2.75 per cent ranges for
ecast by the Chancellor in his Budget a fortnight ago.
Richard Lambert, the CBI's director-general, said that, having enjoyed two years of strong growth, "we are now living in uncertain times".
Today's downgrade casts fresh doubt on Treasury predictions for GDP growth.
The Chancellor continues to remain more optimistic than most independent forecasters, including the Ernst & Young Item Club and the CEBR, for both this year and particularly 2009, when Darling predicts growth will return to its long-term average.
The CBI said the effect of tighter lending condi- tions on households and businesses following last summer's credit crunch "was yet to be fully felt". Ian McCafferty, the organisation's chief economic adviser, said: "The UK economy is being buffeted by some strong headwinds, with the prolonged troubles in the financial markets making for a bumpier ride this year and next.
"High commodity prices are adding to inflationary pressures and significantly squeezing household incomes."
The Bank of England, which is charged with setting UK interest rates, faces a tricky balancing act as the economy slows but inflationary pressures gather pace.
McCafferty argued that a weaker economy would bring inflation down in the medium term, giving the central bank scope to trim borrowing costs twice this year and again early in 2009. He also noted that UK exports were being helped by a weaker pound, particularly against the euro.
The CBI's forecast for net trade has improved for 2008 and 2009, with exports growing by 3.8 per cent this year and 5.5 per cent in the next, compared with imports growing at just 2.2 per cent and 3.3 per cent respectively.
However, investment is forecast to slow dramatically this year – growing by just 1.4 per cent compared with 5 per cent in 2007.
While no geographic breakdown was provided in today's report, CBI Scotland's assistant director, David Lonsdale, outlined the impact of lower UK growth on the Scottish economy.
"Scotland's economy continues to perform moderately well," he said, "but the chances of sustaining that performance, let alone improving on it, will be all the harder if the wider UK growth rate eases back this year and next as forecast.
"The easing back of the growth projections reinforces the need for policy makers north and south of the Border to put the needs of business at the very heart of their priorities."
The CBI predicts the consumer prices index measure of inflation will peak at 3.2 per cent in the third quarter of 2008 – a level requiring an open letter from Bank of England Governor Mervyn King to Darling to explain the rise. Figures released earlier this month showed inflation soaring to a nine-month high of 2.5 per cent in February.
