The CBI predicts slow growth in 2010 as the rise in VAT has a detrimental effect.

The CBI says that the UK will see slight growth in the second half of 2009, signalling a slow recovery out of recession, but warns that 2010 will remain fragile.

In its latest economic forecast, the CBI predicts that UK GDP will post Q3 growth of 0.3%, edging up to 0.4% in Q4, as consumers enjoy the benefits of the reduced VAT rate before it rises up to 17.5% in January 2010. It says that this VAT increase could then slow spending in early 2010 and as a result 2010 will start with weak growth of just 0.1% in Q1, rising to 0.3% in Q2. 

Richard Lambert, CBI Director-General, said that the Bank of England’s strategy of qualitative easing may be starting to make an impact, but he remained cautious: “The outlook is improving as the UK draws strength from quantitative easing, a weak pound and a recovering global economy.

“Although growth this quarter should mark the end of the recession, conditions in the UK will remain tough for some time yet, and it is difficult to see where demand growth will come from.”

It seems that the Bank of England policymakers are also confident that qualitative easing has been the right option for the UK, as it was confirmed today that all nine members voted unanimously to keep their asset purchase programme at £175 billion, and also to hold interest rates at 0.5%.

September’s minutes did however say that consideration for a larger asset purchase programme could be considered in order to further aid the economic recovery.

The policymakers also warned that hopes of a quick recovery should not be taken too seriously, as there was a ‘risk of a false dawn’: “High levels of public debt internationally and the persistence of global imbalances remained downside risks to the sustainability of the recovery.”