UK unemployment not to fall over next two years

The UK's unemployment rate is expected to peak this year and will remain stubbornly high during 2012, the Confederation of British Industry (CBI) said on Wednesday.

CBI estimates that the unemployment rate in Britain will reach 8.4 percent in 2011, up from 7.9 percent last year and that it will remain unchanged in 2012.

According to official estimates from the Office for Budget Responsibility (OBR), the jobless rate in the UK is forecast to reach 8 percent in 2011 and decline to 7.7 percent in 2012.

In its emergency budget in June 2010, the coalition government proposed fiscal consolidation amounting to £113 billion ($179 billion) per annum by 2014-2015, aimed at cutting 500,000 public sector jobs among other measures.

The UK government also planned to increase tax revenues mainly by raising the value added tax (VAT) from 17.5 percent to 20 percent by January 2011.

CBI expects the UK economy’s growth to slow to 1.8 percent in 2011 compared with already sluggish 2 percent growth last year.

“While this growth will still be lower than the long-term average and unemployment will continue to creep up, job numbers will also increase as the recovery picks up,” said John Cridland, director general, CBI.

Inflation in the UK is forecast to remain stubbornly high during this year as a result of increase in VAT and pressure from rising energy and commodity prices, CBI said.

Consumer price index (CPI) inflation will exceed the Bank of England’s (BoE) target of 2 percent in 2011 for a second year running, it said.

“Persistently high levels of inflation, caused by rising energy and commodity prices and the VAT increase, are also a concern. This makes it more likely that the Bank of England will need to start putting up interest rates from their record low level from the second quarter of this year,” said Ian McCafferty, chief economic adviser, CBI.

However, inflation is expected to settle close to the target of 2 percent throughout 2012 as the BoE starts normalizing monetary policy in the spring, the group said.