Recession to end this Christmas, unemployment to rise till Autumn 2010

The CBI said that the upcoming increase in VAT would spur consumers on in the final weeks of 2009 and lead to economic growth of around 0.5 per cent in the final quarter of the year.

Growth in the first two quarters of 2010 is predicted to be very low at 0.3 per cent, but will likely reach 0.5 per cent to 0.7 per cent by the end of 2011, as household spending recovers and businesses rebuild their stocks.

The CBI said it expected annual UK GDP growth of 1.2 per cent in 2010 and 2.5 per cent in 2011. UK GDP will not reach pre-recession levels until the end of 2011, the CBI said, demonstrating “the depth of the recession and the weakness of the economic recovery”.

John Cridland, Deputy Director-General of the CBI, said, "The outlook is brightening as the global economy finds its feet, although we will need to keep our nerve during early 2010, and there is no sign of a clear driver of strong economic growth. In the spring many staff will face another cycle of wage freezes, and job losses will continue rising until the autumn.

"Although the first few months of 2010 will be difficult, growth will gradually pick up and increasing confidence and demand will lead the UK into a more positive 2011. Consumer spending looks to be slightly more resilient than we first thought, and a weaker pound will help to support export growth.

"However, the economy will be on a fragile path of very slow growth, as we continue to feel the lasting effects of the financial crisis. And it remains vital that government sets out clearer plans to address the fiscal deficit at its next opportunity in order to help shore up future UK economic prospects."

According to the CBI unemployment will continue to rise and is likely to peak at around 2.8 million in the third quarter next year, lower than the 3.0 million feared. Average wage growth is expected to be “very constrained” next year, but is likely to be 3.9 per cent in 2011.

The CBI predicted that household consumption would contract on a quarter on quarter basis by 0.2 per cent in the first quarter of next year, as sales are hit by the VAT rise. Household consumption is then predicted to grow for the rest of 2010 with an annual growth rate of 0.4 per cent by the end of the year and of 2.3 per cent by end of 2011.

Ian McCafferty, Chief Economic Adviser at the CBI, said, "The UK economy faces a number of structural hurdles over the coming two years, and this recovery - like that of the 1980s - will be relatively drawn out. Credit conditions will remain difficult as the banks slowly nurse themselves back to health, consumer spending will be shaped by the need to rebuild savings, and the public sector will soon have to tighten its belt. All three factors will act as headwinds to growth."