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Time for new government to focus on the economic fundamentals, says CBI

The UK is expected to see steady but subdued economic growth over the next couple of years, according to the latest CBI economic forecast out today (Tuesday). 

After a strong performance over the second half of last year, growth slowed in the first quarter of 2017 and a slower pace of growth is expected to persist. The economy continues to face headwinds, with ongoing political uncertainty and Brexit negotiations set to begin, which will require careful navigation by business and the Government in the months ahead.

Following stronger than expected growth in the latter half of 2016, the UK’s leading business group is now forecasting 1.6 per cent growth for 2017 and 1.4 per cent in 2018 compared with the previous forecast of 1.3 per cent and 1.1 per cent respectively.

However, the CBI’s view of the outlook remains unchanged compared to the previous November forecast, with the same average quarterly growth of 0.3 per cent from the second half of this year as in November. This is half the average pace of growth from 2013 to 2016. Domestic demand will play less of a role in driving growth, but net trade will provide additional support as exports are lifted by the lower pound amid a solid global economic backdrop.

The CBI is looking forward to working with the new Government and focusing on the economic fundamentals: getting Brexit right and investing in skills, innovation and infrastructure to help shore up the foundations of the economy.

Carolyn Fairbairn, CBI director-general, said: “The UK economy has proved hardy in recent times, with firms up and down the UK getting on with what they do best by investing and creating jobs. Growth should be steady, if restrained, over the next couple of years as the pace of the economy shifts down a gear.

“While the country’s exporters should emerge as a real catalyst of growth, rising inflation and stubbornly low wage growth mean that people are already starting to feel the pinch. Tighter purse strings mean slower household spending growth and uncertainty is likely to weigh on the minds of those making major investment decisions.

“So, after a frantic period in Westminster, this is the time for a renewed focus on the economic fundamentals of this country. Above all, the new government has the opportunity to signal loudly and clearly that Britain is a great place to do business – relentlessly focussing on investing in infrastructure, innovation and skills nationwide, while delivering a sensible and competitive tax and regulatory environment.

“Most important of all, we need to move much faster to fix the foundations of the UK economy, addressing our persistently underwhelming productivity performance. The new Government can breathe life into a new Industrial Strategy delivering a fair, innovative and competitive economy fit for the 21st century, raising living standards and spreading prosperity to all corners of the UK.

“And now Brexit negotiations are beginning, it will be essential that negotiators on both sides remain cool, calm and collected, in order to make rapid progress on what a successful new relationship will look like. Putting trade, jobs and people first by agreeing transition arrangements and guaranteeing EU citizens’ rights early on would set the right tone.

“But the less likely a deal starts to look, the harder it will be for firms to recruit and retain talent as well as push the button on big investment decisions. We must get Brexit right.

“To achieve this, now is the time to build the best partnership anywhere in the world between business and government, shoring up the foundations of our economy. Firms of all sizes, from start-ups to multinationals, are ready and up for the challenge.” 

Following a sharp slowdown in GDP growth in the first quarter (to 0.2 per cent), the CBI expects a mild rebound in Q2 (to 0.4 per cent), with our surveys pointing to firmer momentum. Thereafter, we expect quarterly growth to remain around 0.3 per cent-0.4 per cent over the forecast period – about 50 per cent slower than the average seen since 2013 (0.6 per cent).

We expect less support from household spending, with growth slowing in both 2017 (to 1.7 per cent, from 2.8 per cent in 2016) and in 2018 (0.7 per cent). Real earnings are likely to remain under pressure from rising inflation: on the CPI measure, inflation is expected to stay close to current levels (2.9 per cent in May) through to the end of this year, and average 2.7 per cent in both 2017 and 2018. While we expect wage growth to pick up, it is still set to remain below inflation in 2017 (at 2.4 per cent), and to be broadly in line in 2018 (2.8 per cent).

Business investment is expected to hold up over the near-term, with our survey data pointing to an improvement in investment intentions since the referendum. But with uncertainty still holding back larger spending projects, we expect investment to wane over the course of 2018. While we have upgraded our forecast for business investment (1.3 per cent in 2017 and 1.5 per cent in 2018) compared to November (0.0 per cent and -1.2 per cent respectively), this masks a slowing in quarterly growth we now expect over 2018 in particular.

Softer domestic demand is counter-balanced by more support from net trade, with export growth supported by the lower exchange rate and a global recovery. Weaker domestic demand is also expected to push down on import growth. After a large drag in Q1 2017, we expect net trade to support economic growth throughout the forecast period.

With inflation remaining above the Bank of England’s target and the Monetary Policy Committee’s tone recently turning more hawkish, the CBI anticipates a small rise in interest rates – to 0.5 per cent in Q3 2018. Further rate rises beyond our forecast horizon seem likely, given the lack of spare capacity in the economy and provided the EU negotiations go smoothly.  

Rain Newton-Smith, CBI chief economist, said: “The resilience in the UK economy over the second half of last year is a testament to businesses of all sizes and sectors. Even accounting for weaker growth at the start of 2017, the momentum from last year gives us more of a lift as we move ahead, and this explains our higher annual growth forecast relative to November.

“But very little has changed in our view of the nature of the outlook. Growth will be slower in the years ahead as living standards are hit by rising inflation; and after some initial strength, uncertainty will weigh on business investment. But with the pound still low and expected to remain so, we do expect more of a lift from net exports.

“Trade will be also be supported by a firm global backdrop. World growth should continue to improve as the US economy ticks along, the Eurozone continues its gradual recovery and emerging market growth motors along.

“But risks to our forecast remain high. In particular, uncertainty over the UK’s future role in the EU could have more of an impact on both activity and financial market volatility than we expect. In the near-term, there are more risks to the upside too: particularly with surveys pointing to firmer growth over Q1 2017 and going into Q2.”

 

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