2011: the year of living thriftily?

The CBI's latest musings on the UK economy don't make for particularly cheery festive reading: the employer group has just downgraded its Q1 growth forecast to a nigh-on-flatlined 0.2% (it was previously 0.3%), warning that higher VAT is going to put the squeeze on consumer spending. And the bad news won't end there, it reckons: it's also scoffed at the Bank of England's suggestion that inflation will sort itself out before too long, arguing this won't happen without big hikes in interest rates. That means higher prices in the short term, followed by pricier mortgages in the long term. In fact, about the best the CBI can do by way of glad tidings is that we'll avoid the dreaded double-dip - but that seems scant consolation, given all the above...

The CBI isn't the first influential voice to suggest a distinct lack of confidence in the Bank of England's current approach to inflation. The boffins in Threadneedle Street (well, most of them) have argued that even if inflation goes higher in the short term - which seems inevitable, given the VAT hike in January - it will fall back of its own accord towards their 2% target in the months to come, thanks to weak demand and excess capacity. But the CBI begs to differ: it reckons the continuing rise of energy and commodity prices will keep pushing prices (and therefore CPI inflation) up towards 4% - and that inflation will still be above-target by the end of 2012. Since this is the Bank’s main job, that wouldn't do wonders for its credibility, would it?

Admittedly, the CBI does think that inflation will dip below target in the first few months of 2012. But that appears to assume that the MPC will start being a bit more aggressive with interest rates (as member Andrew Sentance is already suggesting). It reckons the Bank will start to 'normalise' policy (i.e. hike rates) from springtime onwards, with the base rate rising to 2.75% by the end of 2012. For the 7m Brits currently enjoying variable-rate mortgages, that could sting a bit.

The end result, the CBI reckons, is that the economy will keep growing throughout 2011 - but only just. It's not expecting quarterly growth to beat 0.5% at any stage next year, with take-home pay likely to fall and unemployment remaining stubbornly high. It's forecasting growth of 2% for the year as a whole, and although it has inched up its forecast for 2012, to 2.4%, it also warned this is well below the sort of growth you normally see three years after the end of the recession.

So the message is pretty clear: this year and next are going to be a long, hard grind. Happy Christmas from the CBI...