As a member of the CBI, we thought we should share relevant extracts from the recent update from the Director General:
"This morning's news that the UK economy grew at its fastest pace in four years, during the second quarter, came in marked contrast to the mood of heightened uncertainty that I've met in my travels around the UK during the past couple of months. GDP growth of 0.3 per cent, in the first quarter, has been followed by a reported rise of 1.1 per cent in the three months to June. This is getting on for twice the rate that most people were expecting.
Once you start to unpick the numbers, though, they look rather less exciting. Construction accounts for most of the surprise on the upside. Government consumption also picked up smartly in this quarter, perhaps the last hurrah of the Labour Government before the election.
The figures will have been boosted further by a turn round in the inventory cycle, as firms start to refill the stock pipeline after heavy cutbacks during the previous two years.
For all these reasons, we expect the pace of growth to be more subdued over the rest of the year and into 2011.
Overall, though, the news background has been looking rather more favourable in recent weeks than had been the case in May and June. Equity prices appear to have stabilised....the mood in the Eurozone has also been calmer.
And some positive business surveys from the continent, showing Germany and France moving ahead strongly.
Here at home, business surveys continue to point in the direction of recovery.
Retail sales figures for June were stronger than expected, and the latest employment numbers look encouraging.
On past form, the private sector is more than capable of offsetting the 600,000 job losses in the public sector that are forecast over the next six years. This needs growth of 0.4 per cent a year in private sector jobs: Goldman Sachs estimates average growth in private sector employment, since 1983, has been 0.6 per cent a year.
Business generally supports the Government's plans to cut the fiscal deficit, but are having to think through the impact of a squeeze, equivalent to around 8 per cent of GDP over the next five years.
Following the recent Budget, the IMF cut its UK growth forecast for next year back from 2.5 to 2.1 per cent.
Inflation is a worry, with the consumer price index coming in above expectations, on a monthly basis. The VAT increase scheduled for next January means inflation could run above the Bank of England's target for most of 2011.
Credit conditions remain tight. Net lending to business is still shrinking from month to month. The Treasury is scheduled to publish a consultation paper to encourage the credit expansion required to finance the rise, in business investment and trade, on which hopes for recovery are firmly pinned.
The medium term outlook remains uncertain.
Although we continue to think a double dip recession unlikely, doubts about the strength of the recovery will persist. What's required now above all is confidence.
The heavy cloud of uncertainty hanging over the banks - about rules covering future funding, liquidity, structure and supervision - must be lifted asap. They need confidence to finance increasing economic activity.
Business people need to believe in a stable economic outlook to allow them to raise their appetite for risk. This will also support the increase in investment and trade needed to get the economy back on to its feet.
Richard Lambert
CBI Director General
