CBI said that the downgrade is largely due to weaker than expected official GDP data for the first quarter of 2015, which is a "temporary blip".
However, following Q1 growth of 0.3%, the CBI predicts a strong rebound in the coming months with quarter-on-quarter growth of 0.8% in Q2, 0.7% in Q3 and 0.6% in Q4. This also follows the official upgrade of growth in 2014 as a whole to 2.8%, from 2.6%.
Despite growth prospects looking healthy at home, there are headwinds to the recovery, with a still sluggish Eurozone and renewed uncertainty over Greece’s economic future.
Inflation is set to stay below 1% over the course of this year, but should rise relatively quickly from late 2015, from 0.2% in Q3, to 0.6% in Q4, and to 1.3% in 2016 Q1 as the effect of falling oil and food prices continues to unwind.
The CBI is predicting average annual inflation of 0.2% in 2015 and 1.6% in 2016.
This year, investment is expected to bolster GDP growth further, rising by 4.5% and 6.4% in 2016, as the UK’s expansion presses ahead and borrowing costs remain low. Meanwhile, government consumption is set to fall by 0.7% in 2016 after growth of 1.2% this year.
House price inflation picked up in March on a year earlier, bringing five consecutive months of slowing prices to a halt, but it is expected to ease from 5.5% this year to 2.8% in 2016.
John Cridland, CBI Director-General, said:
“The recovery has built up a good head of steam and we expect to see solid, steady and sustainable growth carrying through into next year.
"Businesses on the ground are seeing a pretty solid recovery. Business investment is making a strong contribution to growth, while solid consumer spending is being underpinned by rock bottom inflation, low interest rates and rising incomes.
“Risks remain in the form of economic instability in Greece and a sluggish Eurozone, and clearly the EU referendum is a hot topic in Britain’s boardrooms. Businesses now have certainty that the referendum is happening, but not the outcome. However, most of our members are clear they want to remain in a reformed EU and will get behind an ambitious reform agenda.”
Rain Newton-Smith, CBI Director of Economics, said:
“The UK is up among the lead runners in the pack of G7 economies. While we are seeing a strong domestic picture, cracking the productivity conundrum would really help cement the recovery.
“Overseas the picture is less rosy. The Eurozone has regained some momentum this year, thanks in part to the European Central Bank’s quantitative easing programme, but growth is unlikely to pick up much further as the initial boost from falling oil prices fades.
“Recent talks over Greece underline the need for a decision on extending bail out financing. Meanwhile, weaker US growth and the slowdown in China, coupled with the strength of Sterling against the Euro, are acting as a drag on exports.”
