UK 'to recover slowly from 2010'

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The UK economy is stabilising but it will not be until early next year that a "slow and gradual" recovery will begin, business leaders have said.

The economy will contract by 3.9% over 2009 before seeing a return to growth of 0.7% next year, the CBI predicted.

"The harshest period of the recession looks to be behind us," said CBI director general Richard Lambert.

But he warned people against getting carried away by talk of "green shoots" in the economy.

In the Budget, the chancellor forecast the economy would shrink by 3.5% this year before expanding by 1.25% in 2010.

Of the CBI's less optimistic forecast, Mr Lambert said: "The return to growth is likely to be a slow and gradual one; difficult credit conditions are still affecting business behaviour.

"For positive growth to return, lenders need to feel more confident so that credit can start flowing again."

Some commentators have been carried away by recent tentative indicators as evidence of 'green shoots' Richard Lambert, CBI director general

Last week, the National Institute of Economic and Social Research (NIESR) estimated that the UK economy resumed growth in April and May.

Martin Weale, director of NIESR, said that he expected the next set of official GDP figures to show "either that the recession is over or that it is close to over".

But Mr Lambert said he believed it was too soon to be calling the end of the recession.

"Some commentators have been carried away by recent tentative indicators as evidence of 'green shoots'," he said.

"It will take some time before we can be sure these shoots have roots we can depend on for sustainable growth."

Restraint

The CBI expects GDP to fall by 0.1% in the third quarter of 2009 and to be flat in the final three months of the year.

Modest growth, it says, will resume in 2010, with the economy expanding by 0.1% in the first three months and by 0.3% in the second quarter.

The group predicts that by the end of the recession, the economy will have shrunk by a total of 4.8% - less severe than the 5.9% contraction seen in the early 1980s.

It expects inflation to fall below the Bank of England's target of 2% in the third quarter of 2009.

Although the Bank is currently undertaking a policy of quantitative easing - expanding the amount of money in the system by buying assets, usually government and corporate bonds - the CBI believes the central bank will return monetary policy gradually to "a more normal footing" by the spring of next year.

At around the same time interest rates will start to edge up, it says.

The CBI also forecasts unemployment to peak at just over three million in the second quarter of next year.

"The restraint shown by businesses and their staff in setting pay awards and accepting short-time working should help to curb the pace of job losses," said Ian McCafferty, the group's chief economic adviser.