The CBI has downgraded its economic forecast for 2008.

The Confederation of British Industry (CBI) has published its latest quarterly economic forecast – lowering its figure for this year’s rate of GDP growth in the UK down 0.2% to 1.8%.

The UK’s business group has downgraded its 2008 outlook, forecasting even slower growth in 2009 due to continued troubles in the credit markets, rising commodity prices and weak domestic and global demand.

Inflation is also set to rise according the CBI, expecting that the CPI rate of inflation will peak at 3.2% in Q3 of 2008, forcing the Governor of the Bank of England to write a second letter to the Chancellor.

Interest rates are expected to be cut in the second and fourth quarters of this year, with one more reduction early next year. This would bring interest rates down to 4.5% by early 2009.

CBI’s Director-General, Richard Lambert, said: “Having enjoyed two years of strong growth, we are now living in uncertain times. We are facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth. 

“Our flexible labour market is a real force for stability and our best bet is still that our economy will continue to show modest growth this year and next, before starting a gradual recovery.”

The biggest downward revision in the CBI’s forecast has been to household spending, as purchasing power is heavily squeezed by higher food and energy prices. Consumption is forecast to slow more sharply than previously thought, from growth of 3.1% last year to just 1.6% this year – down 0.3% on the previous forecast in December.

However, while the weakness of the pound will make the cost of imported goods and services more expensive, the depreciation of sterling will help exports, and the forecast for net trade has improved for 2008 and 2009.

Finally, investment is forecast to slow this year – growing by 1.4% compared with 5.0% in 2007. A modest fall in property expenditure contrasts with continued growth in government spending and business investment.

For more information, visit: www.cbi.org.uk