CBI calls for half-point cut in rates, joining chorus predicting recession

BRITAIN'S business leaders today joined the voices forecasting a recession in the UK economy and demanded a half-point cut in interest rates to help revive growth.

The CBI predicted that the economy will have shrunk by 0.2 per cent between July and September, followed by a 0.1 per cent decline in the fourth quarter.

Its warning of a recession – defined as two successive quarters of negative growth – follows similar forecasts from the European Commission and the Organisation for Economic Co-operation and Development. The British Chambers of Commerce has also predicted the country will slip into a recession.

David Lonsdale, assistant director of CBI Scotland, said the key question was not whether the economy would technically enter a recession or not, but how long any downturn may last.

"Scotland's economy has been growing at a modest rate in recent years," he said.

"However, the chances of sustaining that, let alone improving on it, will be very difficult if the wider UK economy experiences a mild downturn over the remainder of this year and anaemic growth in 2009, as predicted.

"Government can help by keeping a tight lid on those costs under their control that impact on firms.

"The recent cut in business rates for SMEs is welcome recognition of this, but we want to see every new policy tested against a single benchmark – will it aid firms to create wealth and jobs when the recovery comes?"

The CBI downgraded its forecast for 2008 growth to 1.1 per cent from 1.7 per cent and said next year the UK economy would expand by just 0.3 per cent – the lowest rate since 1992 – against an earlier estimate of 1.3 per cent.

It also believes unemployment will top the two million mark next year, up from 1.67 million out of work between April and June this year.

In other gloomy predictions, the business organisation said fixed investment was expected to shrink by 3.5 per cent in 2008 and by 4 per cent next year.

And unless government policy changes, it estimates that net borrowing will top £54.8 billion in 2008-9 and £65.2bn in 2009-10, which represents 3.8 per cent and 4.4 per cent of GDP. Net borrowing was £34.9bn in 2006-7.

After peaking at 4.8 per cent this quarter, the Consumer Prices Index measure of inflation is expected to fall back "quite rapidly" in 2009, triggering a series of interest rate cuts, the CBI added.

CBI director-general Richard Lambert said: "Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived."