British growth forecast downgraded amid food, fuel price rise

By Dipankar De Sarkar, IANS

London : Rising food and fuel costs coupled with the global credit crunch are set to cut Britain’s economic growth rate in 2008, the Confederation of British Industry (CBI) said Monday.

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The group thinks Britain’s annual growth will hit 2 percent next year, down from 2.2 percent forecast in September, marking the CBI’s third consecutive downgrade for 2008.

But although inflation is set to rise to around 2.6 percent, talk of a full-blown recession is exaggerated, it said.

“Whilst the 2008 slowdown may appear dramatic set against this year’s strong growth, the fundamentals of our economy remain sound and talk of a full-blown recession is overstated,” the CBI’s chief economic adviser Ian McCafferty said.

He said oil prices, up 20 percent since September, would be a key factor in the slowdown, potentially contributing to inflationary pressures while adding to the effects of the credit squeeze on profits and discretionary spending.

“This all makes for an incredibly challenging year for the Bank of England.

“It has to keep a very careful eye on rising prices for commodities such as oil, gas and food as well as consumers’ inflation expectations, whilst ensuring that monetary policy doesn’t unnecessarily impact on an already slowing economy.”

More worryingly, uncertainty over size of sub-prime losses – loans made to borrowers with no or little credit histories – may dampen consumer spending. Growth in consumer spending is set to fall from 3.1 percent this year to 1.9 percent in 2008, it said.

Investment growth is tipped to slow sharply in 2008 at 1.8 percent, from 5.7 percent in 2007, stemming partly from lower property-related investment. But other sectors are set to see better investment levels, says the CBI.

“Finance and construction will be hardest hit,” predicts the CBI.

On the bright side, real household incomes are expected to rise modestly next year and the pound is expected to weaken, fuelling British exports.

The growth downturn forecast was not entirely unexpected but adds to the political problems facing Prime Minister Gordon Brown in the midst of the festive season.

Seen as one of Britain’s best finance ministers of the post-War years, Brown is credited by even his opponents as being the architect of Britain’s strong economic showing over the past decade.

However, a series of recent political bunglings has prompted a vicious attack on him by his political opponents, who have portrayed him as indecisive and unfit to govern. The Labour Party has sought to fend off these attacks by pointing to Brown’s strong skills as an economist but analysts said the latest CBI forecast could give the opposition Tory Party just the ammunition it needs.