Business faces a “slowdown of uncertain depth and duration” this year, amid big challenges from the global economy, the CBI gives warning today.

Richard Lambert, the Director-General of the employers’ organisation, said the global credit crunch and other factors could have a tougher impact on the UK than on other economies because of its dependence on the financial sector.

He also repeated warnings that the difficulties experienced by the financial sector would spread to other parts of the economy.

Mr Lambert said higher energy and commodity prices meant that profits would be squeezed but inflation stoked, thus limiting the ability of central banks to cut interest rates to boost economies.

He said: “These are problems for the whole industrialised world, but they pose particular difficulties for the UK. The financial sector plays a big part in our economy – it represents nearly a tenth of GDP – and has made a major contribution to growth in recent years.”

The CBI recently revised its forecast for growth in 2008 down to 2 per cent as it assessed the likely medium-term impact of the credit crunch. It expects about the same level of growth next year, but it has said that the reality could turn out to be worse.

However, Mr Lambert cautioned against talking up fears over the severity of a slowdown. He said: “It is important not to exaggerate the risks. The most likely outcome for the UK is that the coming 12 months will bring a soft, as opposed to a hard, landing after two years of above-average growth. If we allow ourselves to get carried away by today’s gloomy headlines, we could talk ourselves into something much worse.”

He also said that Britain had several reasons to be optimistic amid the global financial uncertainty, including the amount of equity owned by mortgage holders. “The latest Bank of England survey shows that around 60 per cent of mortgage borrowers have more than £100,000 of equity in their homes compared to less than 10 per cent in 1993,” Mr Lambert said.

The CBI believes the prospects for employment are fair, largely because of the flexibility of the UK labour market, which makes strong use of agency and temporary workers. The CBI has repeatedly clashed with unions over the issue, with unions believing that a two-tier workforce is being created. The employers’ group recently won a victory when the European Union again failed to push through a directive that would have given agency workers the same rights as permanent employees.

Mr Lambert said: “In contrast to past decades, Britain’s flexible labour market means that employers can adjust to changes in business conditions and output, at least over the short term, without having to take on large numbers of people or make them redundant. This acts as an important force for stability in the UK economy and it is one reason why CBI members regard labour-market flexibility as such a vital part of the UK’s economic toolbox.”

The CBI forecasts that growth in Asia and India will help to stabilise the world economy. Mr Lambert said: “The global outlook remains fair, despite the likely slowdown in Europe and the US. Further strong expansion in China and India should help to push world GDP up by perhaps 4 per cent in 2008, which will support our export markets.” China and India, the CBI believes, have become the main driver of world growth as the US has slowed down.

The employers’ group also predicts that the price of carbon will operate as a sort of new currency, as high energy prices and the role of carbon pricing in the energy markets shape investment decisions.

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