11 June 2015

CBI sees solid, steady and sustainable economic growth ahead

The UK’s leading business group is forecasting 2.4% growth for 2015 and 2.5% in 2016. That represents a slight downgrade compared with February’s forecast of 2.7% and 2.6% respectively, largely due to weaker than expected official GDP data for the first quarter of  - 015, which the CBI believes is a temporary blip.

Following first quarter growth of 0.3%, the CBI predicts a strong rebound in the coming months with quarter-on-quarter growth of 0.8% in Q2, 0.7% in Q3 and 0.6% in Q4. This also follows the official upgrade of growth in 2014 as a whole to 2.8%, from 2.6%.

Despite growth prospects looking healthy at home, there are headwinds to the recovery, with a still sluggish Eurozone and renewed uncertainty over Greece’s economic future.

John Cridland, CBI Director-General, said:

“The recovery has built up a good head of steam and we expect to see solid, steady and sustainable growth carrying through into next year.

“Our members are feeling more upbeat than some of the recent official numbers suggest, with our surveys showing that retail and the service sectors in particular are performing strongly.

"Businesses on the ground are seeing a pretty solid recovery. Business investment is making a strong contribution to growth, while solid consumer spending is being underpinned by rock bottom inflation, low interest rates and rising incomes.

“Risks remain in the form of economic instability in Greece and a sluggish Eurozone, and clearly the EU referendum is a hot topic in Britain’s boardrooms. Businesses now have certainty that the referendum is happening, but not the outcome. However, most of our members are clear they want to remain in a reformed EU and will get behind an ambitious reform agenda.”

After 2014 saw a flush of business investment growth of 7.5%, it now stands at 8.7% above its pre-crisis peak, while UK firms’ profitability (excluding North Sea companies) –– has risen sharply since mid-2013, underpinning investment. This year, investment is expected to bolster GDP growth further, rising by 4.5% and 6.4% in 2016, as the UK’s expansion presses ahead and borrowing costs remain low. Meanwhile, government consumption is set to fall by 0.7% in 2016 after growth of 1.2% this year.

While a recovery in business investment has helped rebalance the economy on the domestic side, there has not been any material rebalancing on the external front, with little contribution to growth from net trade expected this year and next. The UK’s export performance should improve in 2016, as world growth picks up with the US economy forecast to grow by 2.7%, China by 6.5% and the Eurozone by 1.8%.

Rain Newton-Smith, CBI Director of Economics, said:

“The UK is up among the lead runners in the pack of G7 economies. While we are seeing a strong domestic picture, cracking the productivity conundrum would really help cement the recovery.

“Overseas the picture is less rosy. The Eurozone has regained some momentum this year, thanks in part to the European Central Bank’s quantitative easing programme, but growth is unlikely to pick up much further as the initial boost from falling oil prices fades.

“Recent talks over Greece underline the need for a decision on extending bail out financing. Meanwhile, weaker US growth and the slowdown in China, coupled with the strength of Sterling against the Euro, are acting as a drag on exports.”

Inflation is set to stay below 1% over the course of this year. But it should rise relatively quickly from late 2015, from 0.2% in Q3, to 0.6% in Q4, and to 1.3% in 2016 Q1 as the effect of falling oil and food prices continues to unwind. The CBI is predicting average annual inflation of 0.2% in 2015 and 1.6% in 2016. That should continue to boost real incomes, supporting robust consumer spending of 2.7% in 2015 and 2.5% in 2016. Average earnings are expected to grow faster than inflation - at 2.0% this year and 2.4% next year.

The unemployment rate will continue to edge down to low levels from 5.5% in 2015 to 5.3% in 2016.

House price inflation picked up in March on a year earlier, bringing five consecutive months of slowing prices to a halt, but it is expected to ease from 5.5% this year to 2.8% in 2016.