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In its latest quarterly economic forecast the business group puts next year's annual rate of GDP growth at 2.0 per cent, down 0.2 per cent on September’s figure.

Consumer confidence has already weakened due to the ongoing problems in the financial markets and the continuing high energy and petrol costs. Consumer spending is expected to slow more sharply than previously thought, with growth falling from 3.1 per cent this year to 1.9 per cent in the next.

The rate of increase in real household incomes is expected to pick up modestly following weaker growth in 2007, however, offering some support to consumer spending.

Robust growth of emerging economies 

The CBI forecasts slower growth of 1.8 per cent in investment next year, down from 5.7 per cent this year, led by modest falls in property-related expenditure following strong growth this year.

The organisation believes that the outlook for other business investment remains relatively healthy, however, although growth in the world's advanced economies will slow slightly next year.

The continued robust growth of emerging economies and expected depreciation of the pound will help support export markets and shore up the UK's economic prospects.

Inflation will rise during 2008 due to the higher price of oil, gas and food. The CBI forecasts it will reach a peak of around 2.6 per cent towards the end of the year, after which it should fall back to around the target rate of 2.0 per cent by the end of 2009.

Having made a 0.25 per cent cut to interest rates this month, the Bank is expected to make a further cut some time in the New Year to keep medium-term inflation at about target rate.

If credit or economic conditions were to deteriorate further, however, the CBI says a third cut may still be necessary next year.

Borrowing conditions 

Ian McCafferty, the CBI’s chief economic adviser, said that the fundamentals of the UK economy remain sound and talk of a full blown recession is overstated, although the 2008 slowdown may appear dramatic set against this year’s strong growth.

He adds that uncertainty surrounds the extent to which current credit conditions will affect both business and consumer confidence and how far the property markets will suffer. Borrowing conditions are already tighter for some households and businesses.

Another key factor is the price of oil, which has risen by 20 per cent since September. McCafferty thinks that a prolonged period of high oil prices will add to inflationary pressures, whilst putting a squeeze on profits and discretionary spending, compounding the slowdown.

“This all makes for an incredibly challenging year for the Bank. It has to keep a very careful eye on rising prices for commodities such as oil, gas and food as well as consumers' inflation expectations, whilst ensuring monetary policy doesn't unnecessarily impact on an already slowing economy,” he concludes.

Unemployment to rise 

The CBI expects retail price index (RPI) inflation, which is used as a basis for wage settlements, to come down somewhat more than consumer price index (CPI) inflation, due to lower house price inflation and falling interest rates. The RPI rate of inflation is forecast to slow from 4.3 per cent this year to 3.6 per cent in 2008.

The savings ratio is expected to pick up next year, as households increase precautionary savings during a time of uncertainty. The ratio is forecast to increase from 3.3 per cent this year to 4.3 per cent in the next.

Average earnings growth is forecast to remain at 4.0 per cent next year before weakening slightly to 3.9 per cent in 2009.

Whereas unemployment was previously forecast to fall in 2008, the CBI now predicts it to rise to 1.70 million next year and 1.75 million in 2009, due to slower economic growth.

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Related links 

• CBI