UK economy will contract 0.3% in 2012, says CBI

Shoppers in Oxford Street

British shoppers should have more disposable income in 2013, the CBI says

The UK economy is set to contract this year, according to the CBI, the lobbying organisation for big business.

It expects UK gross domestic product (GDP) to shrink by 0.3% in 2012, compared with an earlier forecast of 0.6% growth.

The CBI said the change reflected "weaker economic conditions".

It said the economy would recover slightly in the second half of year and grow by 1.2% in 2013, although this was down from an earlier forecast of 2%.

The latest official statistics showed that the economy contracted by 0.5% in the second quarter of the year, the third successive quarter in which it has shrunk.

Rachel Reeves MP, Labour's shadow chief secretary to the Treasury, said that David Cameron and George Osborne "should now admit their plan has failed and change course before even more long-term damage is done".

"These very disappointing forecasts suggest the short-term boost from the Olympics will not be enough to counteract the longest double-dip recession since World War II," she said.

But the government said it it was "doing everything it can to get the economy moving".

"Growth in the year-to-date has been disappointing, but despite the difficult current conditions employment is rising, and inflation has halved since its peak last year," a Treasury spokesman told the BBC.

Economy 'flat'

Heavy discounting by retailers and a sharp fall in world commodity prices has led to a faster-than-expected drop in the rate of inflation, the CBI's quarterly forecast said.

John Cridland, CBI: "Things will pick up next year. Government needs to help investment happen"

Downward pressure on wages would help keep inflation close to the Bank of England's 2% target throughout 2013.

This would lead to a rise in disposable household incomes and a "modest boost" in consumer spending, it said.

John Cridland, the CBI's director general, said: "At present I believe the economy is flat rather than falling but, nonetheless, momentum seems to have weakened and the latest official figures put the UK in recession for the second quarter of this year."

The CBI believes economic difficulties in the US and the eurozone will continue to keep a lid on UK exports.