Economic downturn worse than feared, says CBI

The economy is expected to slow more sharply than previously feared, business leaders said today, although inflation will come down in the "longer term" as a result.

According to a survey published today by the Confederation for British Industry (CBI), the UK's economy will slow further during the next two years than forecast, thanks to continuing troubles in the credit markets, rising commodity prices and weak demand both at home and abroad.

On top of a sluggish 2008, the CBI expects economic growth next year to be 1.7 per cent, even lower than what it describes as "the Chancellor's more optimistic forecast in the recent Budget of between 2.25 per cent and 2.75 per cent".

The tightest squeeze will be on household spending, hit by rising food and energy costs. Consumption is expected to dip sharply this year, the CBI warned.

But with a slowing economy comes reduced inflation, the CBI said, and the organisation expects the Bank of England's Monetary Policy Committee to be in a position to cut interest rates in the second and fourth quarters of this year.

And the CBI's director-general Richard Lambert said it was not all doom and gloom.

"Outside the financial and property sectors the overall mood of business is, nothing like as gloomy as you might guess from reading today's headlines.

"While there are signs of a high street slowdown and some firms say it's getting harder to raise bank finance, around the country many still report quite positive conditions."