March 31, 2008	Monday	Rabi-ul-Awwal 22, 1429

Without being aware of it, the rich world appears to be losing faith in the ability of the market to self-heal. In fact, the captains of the rich economies seem completely clueless today as to how many Northern Rocks and Bear Stearns are out there.

It was sometime in the early 1970s during the Thatcher-Reagan era that central planning was replaced by the market in the rich economies. The era of deregulation, privatisation and enterprise almost as risky as casino gambling began in the right earnest. One saw this concept sweeping across the West, the US and East Asia without let or hinderance distributing in its wake riches and prosperity all around.

But today this very propserity is being seriously threatened and the market appears to have failed to arrest the rot. In fact, nobody appears to know what has actually gone wrong. And nobody seems to have an answer to the debacle. The US is trying to plug the hole by cutting interest rates and pumping billions into the banking sector. The UK and Europe are holding on to interest rates, helping the banking sector with a few billions and trying hard to cope with rising prices in a slowing economy. But nothing is helping.

Are we hurtling towards the end of the age of market? Would the world go into reverse gear now with governments in rich countries unable to find a solution to the current crisis start expanding and make it their business to be in business once again?

But as they say, habits die hard. The new economist as opposed to the one who faded out in the late 1960s knows no other way than to let the market take care of prices, supplies, demand, services and jobs. So, he still believes, if one went by his prescriptions flying all over, that most economies will continue to remain in the private hands and by some miracle one fine morning a panacea would fall from the skies to save the market from a complete collapse. And in the meanwhile, the rich world could protect its prosperity, it is thought, with some stricter financial market regulations.

But then one thing would logically lead to the other: stricter financial regulations could end up in the tent like the proverbial camel and the market out in the cold like the Sheikh.

Meanwhile, responding to the on-going crisis the Confederation of British Industries (CBI) has downgraded its 2008 outlook for UK growth, and it forecasts even slower growth in 2009 due to continued troubles in the credit markets, rising commodity prices and weak domestic and global demand.

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

The forecast for next year has also been downgraded and the CBI’s figure of 1.7 per cent GDP growth for 2009 contrasts with the Chancellor’s more optimistic forecast in the recent budget of between 2.25-2.75 per cent.

At the same time as the economy is slowing, inflation seems all set to rise. In view of this the CBI is expecting the CPI rate of inflation to peak at 3.2 per cent in Q3 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.

Due to the slowing economy, however, inflation is expected to come down in the longer term. So, the CBI expects the Bank of England will be able to cut interest rates in the second and fourth quarters of this year, with one more reduction early next year. This would bring interest rates down to 4.5 per cent by early 2009.

Having enjoyed two years of strong growth, The UK is now living in uncertain times. The country is facing a financial shock on a scale not experienced in recent times, which is coming on top of already slower growth.

Outside the financial and property sectors, the overall mood of business is, however, nothing like as gloomy as one might guess from reading the daily headlines. While there are signs of a slowdown in consumption and some firms say it’s getting harder to raise bank finance, around the country many still report quite positive conditions.

The biggest downward revision in the CBI’s forecast has been to household spending, as purchasing power is heavily squeezed by higher food and energy prices. Consumption is forecast to slow more sharply than previously thought, from growth of 3.1 last year to just 1.6 per cent this year - down 0.3 per cent on the previous forecast in December.

While the weakness of the pound will make the cost of imported goods and services more expensive, the depreciation of sterling is expected to help exports.

The CBI’s forecast for net trade has improved for 2008 and 2009, with exports growing by 3.8 this year and 5.5 per cent in the next, compared with imports growing at just 2.2 and 3.3 per cent respectively.

Investment is forecast to slow this year – growing by 1.4 compared with five per cent in 2007. A modest fall in property expenditure contrasts with continued growth in government spending and business investment.

A slower economy it is hoped would bring inflation down in the medium-term, so the Bank of England is able to cut interest rates twice in 2008 and again early in 2009. Also on a brighter note, UK exports are being helped by a weaker pound, as the latest CBI manufacturing figures have confirmed.

Other key points of the economic forecast and report include:

Retail Price Index (RPI) inflation, often used as a starting point for wage negotiations, will come down from 4.3 last year to four per cent in 2008, for the year as a whole. Lower house price inflation and falling interest rates will bring it down further in 2009, to 2.9 per cent.

The CBI’s forecast for GDP growth in 2008 and 2009 suggests that public borrowing is likely to rise further than was contained in the budget: £43.2 billion in 2008 rising to £46 billion in 2009. Unemployment figures have been revised down slightly for 2008 to 1.65 million but are unchanged for 2009 at 1.75 million since the previous forecast.