CBI cuts UK economic growth forecast for 2008

Global credit turmoil will hurt British economic growth well into next year, the Confederation of British Industry said yesterday as it cut its 2008 and 2009 growth forecasts.

"This is as much as next year's story as it is one for this year," said Ian McCafferty, the CBI's chief economic advisor.

"It's a much more prolonged headwind we will be driving into, a headwind rather than a short, sharp shock. The second-round effects will be felt for some time after the immediate problems are solved."

The UK's top business lobby group said market turmoil, rising commodity prices and weaker demand had led it to cut its growth forecast by 0.2 percentage points to 1.8 per cent for this year, against government forecasts for 1.75-2.25 per cent growth. The forecast for next year paints an even more pessimistic picture, at a downwardly-revised 1.7 per cent - significantly lower than finance minister Alistair Darling's current range of 2.25 to 2.75 per cent. The CBI expects increasing consumer price inflation, revising its estimates upwards to a peak of 3.2 per cent in the third quarter of this year. Official figures released last week showed CPI hit a nine-month high of 2.5 per cent in February, well above the Bank of England's two per cent target. The Bank faces the tough task of balancing these rising inflationary pressures while trying to encourage growth in a slowing economy.

On top of that, liquidity problems have forced US and European central banks to pump hundreds of billions of dollars into credit markets. But the CBI said no amount of action by central banks would end an unwillingness among commercial banks to lend funds to each other.

"The current problems in the interbank markets will not be resolved until this transparency, the ability to trust counterparties, is restored," Mr McCafferty said.

"Injections of liquidity can prevent bank failure and the cuts in interest rates can make it more attractive to lend, but neither will solve that fundamental problem of valuing the necessary writedowns and thus fully restore that trust."