The Confederation of British Industry (CBI) has downgraded its 2008 outlook for UK growth and forecasts even slower growth in 2009.

In its latest quarterly economic forecast, the UK’s business group has lowered its figure for this year’s rate of GDP growth down 0.2 per cent to 1.8 per cent.

In the Budget this month, Alistair Darling also announced a revision to the government’s predictions for economic growth in 2008, to between 1.75 per cent and 2.25 per cent over the year from his two per cent to 2.5 per cent forecast in October.

The CBI’s figure of 1.7 per cent GDP growth for 2009 also contrasts with the Chancellor’s more optimistic forecast in the recent Budget of between 2.25 per cent to 2.75 per cent.

At the same time as the economy slows, inflation is due to rise. The CBI expects the CPI rate of inflation will peak at 3.2 per cent in the third quarter of 2008 – forcing the governor of the Bank of England to write a second letter to the Chancellor. This compares with 2.7 per cent predicted in the previous forecast.

But the CBI predicts a slowing economy will allow the central bank to cut interest rates down to 4.5 per cent by early 2009.

Richard Lambert, the CBI’s director-general said: “Having enjoyed two years of strong growth, we are now living in uncertain times. We are facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth.”

But Mr Lambert added: “After a few good years, the UK corporate balance sheet is in good shape. Our flexible labour market is a real force for stability and our best bet is still that our economy will continue to show modest growth this year and next, before starting a gradual recovery.”

Although an economic slowdown seems inevitable, figures released by the Office for National Statistics last week show retail sales rose by one per cent in February signalling consumers are still willing to spend, while recent employment data confirms a healthy labour market.