CBI - Richard Lambert, Director General

This morning's news that the UK economy grew at its fastest pace in four years during the second quarter came in marked contrast to the mood of heightened uncertainty that I've met in my travels around the UK during the past couple of months. GDP growth of 0.3 per cent in the first quarter has been followed by a reported rise of 1.1 per cent in the three months to June, which is getting on for twice the rate that most people were expecting.

Once you start to unpick the numbers, though, they look rather less exciting. Construction accounts for most of the surprise on the upside, even though many companies in the sector still believe that times are getting tougher. Government consumption also picked up smartly in the quarter, so perhaps this was the last hurrah of the Labour Government ahead of the election.

The figures will have been boosted further by a turn round in the inventory cycle, as firms have started to refill the stock pipeline after heavy cutbacks during the previous two years. For all these reasons, we expect the pace of growth to be more subdued over the rest of the year and into 2011.

Overall, though, the news background has been looking rather more favourable in recent weeks than had been the case in May and June. Equity prices appear to have stabilised, and the bond market has remained firm. Ahead of tonight's important announcement about the bank stress tests in Europe, the mood in the Eurozone has also been rather calmer. The spread between the yields on Spanish and German government debt has narrowed sharply since mid-June.

And this week has brought some positive business surveys from the continent, with Germany and France both moving ahead strongly.

Here at home, business surveys continue to point in the direction of recovery. Retail sales figures for June were stronger than expected, and the latest employment numbers look encouraging. On past form, the private sector should be more than capable of offsetting the 600,000 job losses in the public sector that the Office for Budget Responsibility has forecast for the next six years. That would take growth of 0.4 per cent a year in private sector jobs: Goldman Sachs estimates that the average growth rate in private sector employment since 1983 has been 0.6 per cent a year.

There are still some big uncertainties ahead. Business people generally support the Government's plans to cut the fiscal deficit, but are now having to think through the impact of a squeeze equivalent to around 8 per cent of GDP over the next five years. Following the Budget, the IMF cut its UK growth forecast for next year back from 2.5 to 2.1 per cent.

Inflation is another worry, with the consumer price index continuing to come in above expectations on a monthly basis. The VAT increase scheduled for next January means that inflation could run above the Bank of England's target for most of 2011.

Credit conditions remain tight, and net lending to business is still shrinking from month to month. The Treasury is scheduled to publish a consultation paper on Monday that will seek to encourage the credit expansion that will be required to finance the rise in business investment and trade on which our hopes for recovery are firmly pinned.

So the medium term outlook remains uncertain, and although we continue to think that a double dip recession is unlikely, doubts about the strength of the recovery are likely to persist. What's required now above all is confidence. The heavy cloud of uncertainty that is hanging over the banks - about the rules covering their future funding, liquidity, structure and supervision-- must be lifted as soon as possible, so that they have the confidence to finance increasing economic activity.

And business people need to believe that a more stable economic outlook will allow

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