CBI cuts economic growth forecast

The business group said it now expects GDP growth of just 2% next year, down from its September estimate of 2.2%.

The cut is the third successive quarterly reduction and came as the CBI delivered a downbeat assessment of the nation's economic prospects.

Consumer confidence has already weakened due to the credit crunch on money markets, which led to the crisis at mortgage lender Northern Rock, it said, while rising oil, gas and food prices will see inflation reach a peak of 2.6%, well above the Government's 2% target.

Unemployment, which the CBI had predicted would fall in 2008, is now forecast to rise to 1.7 million, due to slower economic growth.

The inflation forecast is likely to unsettle policymakers at the Bank of England, who cut interest rates by 0.25% to 5.5% earlier this month amid signs of worsening economic conditions.

The CBI expects the Bank of England to make a further interest rate cut in the new year and added that a third cut may be necessary to ease pressure from a cooling economy. Despite the growth forecast cut, Ian McCafferty, CBI chief economic adviser, said talk of a full blown recession is "overstated".

"Uncertainty surrounds the extent to which current credit conditions will affect both business and consumer confidence and how far the property markets will suffer. Borrowing conditions are already tighter for some households and businesses."

He said another key factor is the cost of oil, which has risen by 20% since September and saw crude prices reach almost 100 US dollars a barrel in November.

The CBI said consumer spending is to slow more sharply the first thought, with growth tumbling from 3.1% this year to 1.9% in 2008 while investment by companies will grow by just 1.8%, compared to 5.7% in 2007. However, it added that the continued robust growth of emerging economies such as India and China and the expected fall in the value of the pound would help support exporters and the wider economy.