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UK economy to grow slightly faster than predicted this year, says CBI, but warns of weaker growth in 2011

The UK economy will continue to grow slightly faster than previously expected this year, although growth next year will be weaker than previously forecast as consumer spending weakens, the CBI has predicted.

The employers’ group has warned that the outlook for consumer spending next year is now weaker as households will have less disposable income due to the inflationary effect of the VAT rise in January and modest wage increases.

Although household spending is expected to receive a boost at the end of the year, as consumers seek to avoid higher VAT in January, growth in spending is forecast to be restrained next year, the CBI said. Consumer spending growth of 0.9% in 2010 is expected to remain virtually unchanged at 1.0% in 2011.

The CBI predicts that the UK economy will grow by 1.6% in 2010, up from 1.3% in its previous forecast in June. The slight upward revision reflects better-than-expected growth in the second quarter this year.

But the CBI has revised down its GDP forecast for 2011, to 2.0% from 2.5% in June. The revised forecast reflects the additional fiscal consolidation measures announced in the emergency Budget, which took place after the CBI’s June forecast.

The CBI expects the economy to grow by 0.3% and 0.6% in the latter two quarters of 2010, after 0.3% and 1.2% growth in the first half of the year. Quarterly growth is then forecast to pick up gradually from 0.3% to 0.6% over the course of 2011.

Although economic uncertainty remains high the CBI said that a double dip recession was unlikely.

“The fragile nature of the recovery is why, in the forthcoming spending review, the Government must focus its scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment,” said Richard Lambert, CBI director-general.

Having stabilised this year, following record falls in 2009, the recovery in business investment will be fairly subdued, with only moderate growth next year, the CBI also predicted.

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