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CBI says recession is over

Source: Reuters - Wed 23rd Sep 2009

Britain has probably come out of recession but the pace of recovery in 2010 will be slow, with tight credit and weak domestic demand posing obstacles to an upturn, the Confederation of British Industry said Wednesday.

The business group said it expected the economy to have grown by 0.3 percent between July and September, and forecasts an expansion of 0.4 percent for the fourth quarter - an improvement from its prognosis in June that growth would not return until early next year.

However, the CBI said the upturn will have been driven by firms starting to increase production after a long period of destocking, and it cautioned it was far from certain that demand would be strong enough to support the recovery going forward.

"Although growth this quarter should mark the end of the recession, conditions in the UK will remain tough for some time yet, and it is difficult to see where demand growth will come from" said CBI Director General Richard Lambert.

"Firms that have run down their stocks will now be starting to raise output to meet demand, and consumers are likely to bring forward spending before VAT rises. But once these two boosts are out of the way, there is no clear driver of robust economic growth into 2010."

SLOW RECOVERY

The economy has shrunk by 5.5 percent in the past five quarters, the biggest drop in at least three decades. However, recent economic data have been firm, leading many experts to conclude the recession may already have ended.

Bank of England Governor Mervyn King also holds this view, but stressed last week that the road to recovery will be a long, hard slog, suggesting monetary policy will remain ultra-loose for some time yet.

The CBI reckons GDP will grow by just 0.1 percent in the first three months of 2010, picking up to 0.3 percent in Q2, and leaving growth for the year as a whole at 0.9 percent, compared with a contraction of 4.3 percent in 2009.

It says there are signs that exporters are benefiting from the weaker pound, but it warns that household consumption will be constrained by job losses and weak pay growth. It still sees unemployment climbing to close to 3 million by the middle of next year.

And the lobby group cited banks' reluctance to lend as a particular concern, after a report from the BoE last week showed a record fall in net lending to businesses in July.

The central bank has tried to get credit flowing through the economy again by slashing borrowing costs to a record low of 0.5 percent and via its 175 billion pound asset purchase program, although policymakers have warned it will take time to work.

"At this stage it's clear that QE has not yet had an enormous impact on the wider economy" said CBI chief economic advisor Ian McCafferty.

"Weakness in access to finance for businesses will be a strong influence on the recovery in 2010, and, as banks rebuild their balance sheets, will act as a headwind to recovery."

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