The UK economy’s recovery is not expected to increase until the middle of 2011 and will remain sluggish for the rest of 2010, according to the CBI.

The economy is expected to grow in Q1 2010 by +0.3% and then +0.4% in Q2, and by slightly more in the next two quarters at +0.5% giving an overall growth in gross domestic product (GDP) of +1.0% in 2010. It also predicts an annual UK GDP growth of +2.5% in 2011, but although the pace of growth should pick up, GDP is still not expected to have returned to pre-recession levels by the end of the year.

Richard Lambert, CBI’s director-general, said: "The economic outlook is improving, but the lack of a clear driver for growth will make for a bumpy ride in the months ahead. The CBI expects the recovery in 2010 to be slow and sluggish, with few signs of real strength until well into next year.

"To convince international investors that the spiralling budget deficit will not derail the economy, the Government must set out a credible plan to balance the books by 2015-16, two years earlier than currently planned.

"It must also avoid damaging tax rises. Targeted spending cuts and smart re-engineering of public services can preserve front line services and deliver the savings that will have to be made. At the same time, it is vital that business has the space to grow, invest and create new jobs. That’s the only way out of our current fiscal mess."

The CBI has forecasted that the Bank of England (BoE) will move away from the current emergency rate, with a small rise in interest rates in Q3 2010, which is later than previously expected, with further small incremental increases taking the bank rate up to 2% by the end of 2011.

Whilst inflation is expected to be slightly higher than previously predicted in the near-term, it is expected to fall back considerably in 2010 with CPI inflation dropping below the BoE 2% target by the end of 2010 and remaining below target throughout 2011