Growth forecasts for the UK have been downgraded as the CBI also predicts that unemployment will exceed two million in 2009, while salary increases remain subdued in attempts to curb inflation.

According to the CBI, inflation is expected to peak at 4.8 per cent this quarter, but is due to fall back to its target of two per cent over 2009, as commodities become cheaper yet the economy remains weak and uncertain.

As a result, the CBI believes that inflation should be back to ‘normal’ by 2010 which should allow the base rate to fall to 4 per cent in attempts to replenish the damaged economy.

Commenting, CBI director general Richard Lambert said: “Over the past year our forecasts for economic growth have been shaved lower and lower as the UK economy continues to struggle with the twin impact of higher energy and commodity prices and the credit crunch. Growth in 2009 will be feeble at best.

“Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived.”

Speaking of the way that today’s economic downturn differs to those that have gone before, he added, “This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged.”

According to the CBI, public finances will be hit hard during the remainder of 2008 and 2009 and more people will turn to credit to survive. In fact, the CBI expects borrowing to hit £54.8billion in 2008/09 increasing to £65.2billion in 2009/10.

CBI chief economic adviser, Ian McCafferty added: “We now appear to be in a mild recession which will run to early next year. The outlook remains very uncertain, but we do not expect the falls in output to be prolonged, and should start to see signs of recovery in the second half of 2009.”

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