RTTNews - The British economy is showing stabilization, but it will not be until the beginning of 2010 that there will be a return to growth, the Confederation of British Industry or CBI said Monday.

The business lobby said the GDP would flatten out in the second half of this year, underpinned by low interest rates and quantitative easing. It expects modest growth to resume during the first three months of 2010, with the growth rate gradually picking up next year.

Ahead of the expected flat reading in the fourth quarter of 2009, the CBI sees a 0.1% quarterly contraction in the third quarter. For 2010, the business group predicts a 0.1% growth in the first quarter and 0.3% in the second quarter.

Richard Lambert, CBI Director-General said, The return to growth is likely to be a slow and gradual one; difficult credit conditions are still affecting business behavior. For positive growth to return, lenders need to feel more confident so that credit can start flowing again.

By the end of the recession, the CBI estimates the economy to contract by a cumulative 4.8%. But this was not as severe as the 5.9% decline seen in the early 1980s. Average annual GDP growth of a modest 0.7% is expected for the whole of 2010, following a 3.9% fall this year.

Inflation is forecast to fall below the Bank of England's target of 2% in the third quarter of this year and remain there throughout the forecast period to the end of 2010. The business lobby expects the central bank to return monetary policy gradually towards a more normal footing by the spring of next year. Currently, the CBI expects quantitative easing to continue for some more months.

Regarding the labor market, the CBI said unemployment is still expected to continue to rise until the second quarter of 2010, and to peak at 3.03 million.

According to the CBI, rising unemployment and an elevated savings ratio have constrained consumer spending. Household spending is estimated to drop 2.9% this year and to grow by a modest 0.5% in 2010.

The weakness in construction investment resulted in a modest revision in the business investment outlook. Total business investment is set to contract 12.4% this year and a further 1.4% in 2010. During the beginning of the year, firms reduced their stock levels, which they would start to re-build next year.

Further, the CBI said the public finances are predicted to be under rising pressure from the recession. Net borrowing is expected to reach GBP 172.3 billion in 2009/10, representing 12.2% of GDP and to rise further to GBP 182.2 billion or 12.6% of GDP in 2010/11.

Last week, the Bank of England's Monetary Policy Committee member Paul Fisher said that there are signs of slowing in the rate of contraction in the economy, but the U.K. should not be complacent. The economy would start to record positive growth over the next year or so, the policymaker said.

Another MPC member, Andrew Sentance said the recession in the U.K. might be bottoming out and we should be able to look forward to a recovery beginning either later this year or early in 2010.

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