The UK economy will continue to make headway in 2011, the CBI has predicted, but growth will remain sluggish, restrained by fiscal consolidation and further erosion of household spending power.
The organisation has estimated GDP growth of 1.7% in 2011 and 2.2% in 2012, only marginally lower than previously forecast. After quarter-on-quarter growth rebounded at a modest rate of 0.5% in Q1 2011, the CBI expects to see steady but modest growth of 0.6% over each of the remaining quarters of the year.

Bright spots include the export market, which is set to make an important contribution to the economy both this year and next, said the CBI. Growth of 8.6% in 2011 and 7.6% in 2012 is expected to outpace the rise in imports over the period, resulting in a positive impact on GDP.

Business investment is also expected to help drive economic growth, with growth of 8.8% in 2011 and 8.7% in 2012 forecast.

However, households are expected to face a second consecutive year in which incomes are eroded by a combination of weak wage growth and inflation. Concerns over jobs, a waning housing market and some acceleration in the fiscal consolidation process are also weakening consumer confidence, with prospects for consumer expenditure looking fragile.

Inflation is anticipated to be higher throughout this year and into early 2012 than previously forecast, said the organisation, largely due to the effect of higher commodity prices.

CBI director-general John Cridland said: "The economy is battling headwinds of squeezed household budgets, weak wage growth, high inflation, and necessary public spending cuts. Concerns also remain over the volatility of oil prices, and the impact of the earthquake in Japan on UK supply chains.

"But there are some brighter spots in the forecast. Global economic conditions remain upbeat, and we expect to see a stronger performance by UK exporters. Business investment will also make a firm contribution to growth in 2011 and 2012. But the rebalancing of the economy is going to take time to feed through, and domestically it may not feel like much of a recovery for some time yet."