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Economy set to escape recession by end of the year

The UK economy is set to emerge from the recession during the fourth quarter of 2009, the CBI has forecast.

But despite returning to growth in 2010, the employers’ group warned that the pace of the recovery will be slow and tentative. So tentative that even by 2011 the economy will still not have returned to its pre-recession levels.

The economy has so far suffered six consecutive quarters of decline, the deepest slump in modern history.

But according to the CBI’s latest forecast, the UK will see GDP expand by 0.5 per cent in the final three months of 2009 as consumers spend to beat the switch to the old 17.5 per cent rate of VAT.

Growth should hit 1.2 per cent next year and 2.5 per cent by 2011, the CBI said.

Unemployment is expected to continue to rise in 2010, peaking at 2.8 million in the third quarter.

The brakes will be eased on wage rises, with average earnings anticipated to rise to 3.9 per cent by 2011.

After an initial increase in 2010, the CBI predicted that inflation will fall back below the Treasury’s 2 per cent target throughout 2011.

The Bank of England will push up interest rates in 2010 to combat the risk of additional inflation, but the CBI also forecast that the Bank rate is not likely to exceed 2 per cent by the end of 2010.

John Cridland, the CBI’s deputy director-general, said: “The outlook is brightening as the global economy finds its feet, although we will need to keep our nerve during early 2010, and there is no sign of a clear driver of strong economic growth.

“Although the first few months of 2010 will be difficult, growth will gradually pick up and increasing confidence and demand will lead the UK into a more positive 2011.

“However, the economy will be on a fragile path of very slow growth, as we continue to feel the lasting effects of the financial crisis. And it remains vital that government sets out clearer plans to address the fiscal deficit at its next opportunity in order to help shore up future UK economic prospects.”

Ian McCafferty, the CBI’s chief economic adviser, added: “The UK economy faces a number of structural hurdles over the coming two years, and this recovery – like that of the 1980s – will be relatively drawn out. Credit conditions will remain difficult as the banks slowly nurse themselves back to health, consumer spending will be shaped by the need to rebuild savings, and the public sector will soon have to tighten its belt. All three factors will act as headwinds to growth.”