Leading business organisation rules out Japan-style 'lost decade' but says Britain must get used to "a new normal"
Britain's leading employers' organisation has warned of a "new normal" of lacklustre growth as it predicted that the economy's long haul out of recession would last for at least a further two years.
John Cridland, director-general of the CBI, called on George Osborne to increase spending on public infrastructure in next month's pre-budget report to help spread prosperity beyond London and its immediate hinterland.
While ruling out a Japanese-style "lost decade", Cridland said: "There is a new normal. We have to get used to steadier growth but it doesn't mean a decade of no growth at all."
After previous recessions, the UK economy has bounced back and recouped output lost in the downturn through several years of growth above its long-term trend of 2.5% per annum.
Cridland said the UK faced challenging times in which growth would be muted. He backed the growth report published by the former Conservative deputy prime minister Lord Heseltine, saying it offered the prospect of growth based on key regional cities.
He added: "London is like an ancient Greek city state, the dynamo of the economy but different in character to the rest of the country. For the economy to be rebalanced we need to get investment across the country and export growth across the country. Not all the growth can be from London and the south-east.
"If rebalancing requires the private sector to take up the slack from the public sector, that is hard in those regions where so much employment and activity are delivered by the public sector."
Cridland said the CBI supported the government in its aim of reducing Britain's budget deficit but said the £23bn cut in capital spending had been excessive. "That's gone too far." We are not spending enough on infrastructure."
The employers' group said it expected the economy to gradually pick up speed over the coming two years, with zero growth in 2012 followed by a 1.4% in 2013 and 2% in 2014.
Publishing its quarterly economic forecasts, the CBI said it was slightly more optimistic about this year and next following the unexpectedly strong official figures for the third quarter of 2012. These showed activity picking up by 1%, stronger than the 0.6% the CBI had pencilled in.
Cridland said that there were downside risks to the forecast mostly stemming from overseas. The CBI is concerned about the uncertainty caused by the US "fiscal cliff", the package of tax increases and spending cuts due to be implemented in early 2013 following last year's deal between the White House and Congress.
Although the employers' organisation said it expected a deal to prevent a 4% reduction to GDP in the US from the planned measures, it believes political brinkmanship in Washington could undermine global business confidence. Uncertainty about the future of the eurozone is also expected to damage sentiment.
The CBI said the biggest domestic threat to its forecast came from inflation, now forecast to be higher in 2013 than previously predicted as a result of increases in utility prices.
Despite the recent "puzzling" resilience of the labour market, a small rise in unemployment was possible in 2013 as a result of the lagged effects of sluggish activity in the first half of 2012. Labour market conditions are expected to improve steadily from the second half of 2013 and throughout 2014, with the jobless rate dropping to 7.7% from 7.9% now.
Cridland said: "Despite the better than expected third quarter performance, the UK economy has bumped along the bottom this year, with overall growth fairly flat. "While we expect underlying momentum to pick up modestly next year and to be slightly stronger in 2014, the pace will remain relatively lacklustre. But major external risks including continuing uncertainty in the eurozone, and risks to inflation, will hit confidence and growth for some time to come."
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