Growth forecasts for UK slashed

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The CBI downgraded 2012 growth prospects for the fourth time amid the worsening eurozone debt crisis and now expects GDP to increase just 0.9%, down from the 1.2% growth it forecast as recently as November. Its prediction for 2013 was also lowered to a modest 2% from 2.2%.

Although growth will remain subdued and conditions tough, it thinks the UK will avoid an official recession - two quarters of declines in a row - as it bounces back from its 0.2% fall in the final quarter of 2011 with growth of 0.2% in the first three months of this year.

And households suffering their longest squeeze in living standards for a generation will receive some much needed relief as the consumer prices index (CPI) rate of inflation continues to fall from its 5.2% peak in September.

Inflation is expected to drop to 2.2% in the final quarter of the year and will remain close to the Bank of England's 2% target throughout 2013.

However, with unemployment rising to 2.9 million in the first quarter of 2013 - higher than its previous estimate of 2.75 million - wage growth is set to remain modest.

The CBI thinks that as the economic recovery continues, the Bank of England will hike interest rates from their record low of 0.5% in the final quarter of 2013 but expects no further emergency quantitative easing to inject cash into the economy.

CBI director general John Cridland said: "Economic conditions will continue to be tough, especially in the first half of the year and the UK recovery will depend on the successful resolution of the eurozone crisis."

The CBI predicts growth will gather pace in the second half of the year, hitting 0.6% in the third quarter but will remain fragile with high levels of uncertainty driven by the eurozone crisis.

It said there are signs the core eurozone countries are seeing signs of stabilisation, which will help boost UK exports.