LEADING City forecasters are revising up their growth predictions for Britain, in spite of the Bank of England’s downbeat tone last week. In the first significant bout of upward revisions since 2007, some forecasters believe that growth next year will be higher than the Treasury’s 1.25% prediction.

This weekend new forecasts from Credit Suisse are for growth in Britain next year of 1.8%, up from 1%.

The firm is also optimistic about recovery in Europe, despite figures on Friday showing a 2.5% slide in eurozone gross domestic product in the first quarter. Its new prediction for the eurozone is for 1.5% growth next year, up from 1%.

“The first phase of the recovery is likely to be driven by an end of the inventory rundown and a possible inventory build-up,” said Robert Barrie, an economist at Credit Suisse. “That will buy some time – possibly a year or so – for those who need to rebuild their balance sheets. In the course of next year we would expect final demand to take over.”

Barrie said the forecasts were at the lower end of previous recovery experience in the eurozone and in line with past experience in Britain. They were below the numbers implied by recent International Monetary Fund research on past recoveries from financial crises.

Credit Suisse said its upward revisions were based on three factors: better news from cyclical indicators, including purchasing managers’ surveys; signs that the downturn was taking on the characteristics of a “normal” recession rather than a depression; the impact of the big rundown in inventories, which has exaggerated the extent of the downturn in both Britain and on the Continent.

Similar considerations have led JP Morgan, another City firm, to revise up its forecasts for Britain. It now expects that the economy will contract by 3.6% this year, in line with the Treasury’s forecast, from a previous estimate of 4%.

Next year, it said, there will be growth of 1.7%, up from a previously predicted 0.5%.

“We are revising up the forecast for UK growth to show a return to gains in GDP in the third quarter of 2009, six months earlier than in our previous forecast, and a somewhat stronger recovery thereafter,” said Malcolm Barr, a JP Morgan economist.

One of the City’s gloomier forecasters, Michael Saunders of Citi, has also adjusted his predictions this weekend. He now expects the economy to decline by 3.9% this year, from 4.1% a month ago. Instead of a 0.7% fall next year, he now predicts slight growth of 0.1%.

“Our forecasts are slightly less bleak than previously, and we now expect the recession to end around the end of this year, rather than extend into early 2010,” he said. “Financial conditions have improved and there are signs that the pace of destocking in the UK and other industrial countries will slow.”

Attention this week will focus on Tuesday’s inflation figures, which are set to show consumer price inflation dropping from 2.9% to 2.5% or below. The retail prices index, which showed deflation of 0.4% last month, is likely to have fallen further into negative territory.

Also this week the Bank will publish the minutes of its monetary policy committee meeting this month at which it agreed to leave Bank rate on hold at 0.5% and unveil an additional £50 billion of so-called quantitative easing.

Both decisions are expected to have been backed by all nine members of the committee.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive