2 November 2016
Economic forecast unchanged for 2016, but slower growth predicted over next two years
The CBI predicts weaker economic performance next year, revising down its GDP growth forecast to 1.3%, from 2% in the previous forecast (May 2016).
The business group’s growth forecast in 2016 is unchanged at 2%, reflecting a stronger first half of the year and resilience in the months since the Referendum. But subsequent uncertainty is expected to hit business investment, which accounts for a significant element of the downgrade. Furthermore, rising inflation is expected to affect household spending, further curbing economic growth.
The Autumn Statement presents a golden opportunity for the Government to build on the Heathrow runway announcement by setting a clear path to drive the economy forward by stimulating investment and reducing uncertainty.
Rain Newton-Smith, CBI Chief Economist, said:
“Certainty and stability, vital ingredients that allow businesses to invest and create jobs across the UK, have been absent since the vote to leave the EU.
“Now, with the economic outlook tempered, business leaders will be looking to the Chancellor to incentivise investment and instil confidence when he delivers his Autumn Statement.
“Re-invigorating innovation, for example by targeting 3% of GDP joint public and private expenditure on R&D by 2025, will help to increase productivity and raise prosperity right across the UK.
“Furthermore, the Government should look to build on its runway announcement by increasing Public Sector Net Investment to 2% and delivering on previous infrastructure project commitments.
“Successfully delivering on an ambitious domestic agenda is now more important than ever against the backdrop of forthcoming UK-EU negotiations, where the only certainty is their complexity.
“On the negotiations businesses are seeking barrier and tariff-free access to the Single Market, as well as access to skills and labour from abroad. In the meantime agreeing transitional arrangements will be vital if businesses are to avoid substantial changes or a ‘cliff edge’ in regulation.”
The UK’s economic fundamentals are solid, as evidenced by last week’s data showing stronger than expected GDP growth in Q3 (of 0.5%). But the CBI expects growth to nudge lower in 2018 (to 1.1%) as household spending growth softens.
A more tepid outlook for households is partly due to a faster pick-up in inflation. The CBI expects CPI inflation to breach the Monetary Policy Committee’s 2% target in the second quarter of 2017, rising to 2.4% by the end of next year. The unwinding of previous falls in fuel prices are expected to raise inflation, with the post-Referendum fall in the Pound exacerbating this rise relative to our last forecast.
In contrast, wage growth has remained stubbornly below pre-crisis levels and is expected to remain unimpressive, with average earnings growth edging only slightly higher in 2017 (2.4%) and in 2018 (2.6%). With the squeeze on real incomes set to tighten, consumer spending growth will fall by more than half next year (from 2.7% in 2016 to 1.2% in 2017) and again in 2018 (to 0.6%).
More support to growth is expected from net exports as the lower Pound aids exports growth, with sluggish domestic demand weighing on imports. Net trade is expected to contribute +0.4ppts to GDP growth in 2017, and +0.6ppts in 2018.
Further afield, growth in the global economy is generally expected to hold up. India will remain among the fastest-growing emerging markets, expanding at just over 7% in both 2017 and 2018 (from a forecast 7.7% this year). Growth in China is forecast to ease gradually (to 6.2% in 2017 and 5.8% in 2018), though the economic superpower is expected to avoid a “hard landing”. Meanwhile, US growth will remain at around 2%.
Rain Newton-Smith, CBI Chief Economist, added:
“The UK economy was on firm footing going into the Referendum and it’s vital that we now seek to preserve these economic strengths.
“While the Pound remains sensitive to economic data and political rhetoric as the UK-EU negotiations develop, weaker Sterling will lead to a welcome boost from net trade, although higher import costs are likely to push up prices. Retailers are particularly concerned about how consumers will react to rising inflation next year.
“Uncertainty means that business investment will remain flat next year before contracting in 2018, and downside risks to our forecasts are even more acute.
“From a UK perspective we need to see fiscal moves buttress monetary policy, so the Government will need to set out an ambitious, pro-enterprise agenda that will get firms investing now, and lift productivity in the future across all UK regions while balancing the books over the longer term.
“It is encouraging that global growth is holding up, with the fallout from Brexit relatively contained. In particular, the Eurozone’s recovery looks to be on track, though political speed bumps remain, including the Italian Referendum next month, and French and German general elections next year.”
Read more on our forecast here.