Quarterly economic forecast
UK economic growth is expected to remain solid, despite slower global momentum and financial market volatility, according to the CBI’s latest economic forecast
The leading business group’s latest quarterly forecast predicts that the UK will remain among the fastest growing advanced economies this year, although the CBI has downgraded its GDP growth forecast for both 2016 (to 2.3%, from 2.6% in November) and 2017 (to 2.1%, down from 2.4%).
The modest adjustments for 2016 are driven chiefly by revisions to historical data, which show that momentum in the economy over 2015 was slightly less than previously thought. Weak productivity and wage growth, leading to a slower rise household spending, is also a factor.
But while the global economic outlook is weaker, particularly given concerns over China and its effect on emerging markets, the UK’s direct exposure is limited.
Carolyn Fairbairn, CBI Director-General, said:
“The UK is likely to remain among the fastest growing advanced economies with strong fundamentals, though our forecast recognises growing overseas risks.
“While there’s little current evidence of uncertainty negatively affecting business investment ahead of the EU Referendum, this is a potential risk to the UK’s solid economic outlook, along with concerns over China and emerging markets.
“And despite domestic demand remaining healthy, it’s clear that increasing productivity remains a priority as a means of achieving sustainable wage growth.
“Overall, the UK economy is expected to see decent growth this year – and in the next. It’s important to keep global economic challenges, such as recent stock market volatility, in perspective.”
While the UK’s labour market has been growing strongly, pay and productivity growth have been disappointing. Both factors have led to a slight downward revision to household spending growth in 2016 (to 2.7%, from 2.9% in our November forecast). The CBI also expects a larger drag in 2016 on growth from net trade (-0.5 percentage points) relative to November (-0.3ppts). This is largely owing to stronger import growth in our forecast, driven in large part by revisions to historical data.
A downgrade to household spending growth over 2017 (1.8%, from 2.2%) is also driving lower GDP growth. The outlook for investment is also marginally weaker in 2017, as lower household incomes weigh on housing investment and slower GDP growth bears down on business investment (rising by 5% in 2017, against 5.4% in our last forecast).
Rain Newton-Smith, CBI Director for Economics, said:
“It’s important to remember is that the UK has largely remained resilient amid recent global turbulence. We have a sound economic footing at home, driven by strong job creation and business investment coupled with low inflation supporting household spending.
“But with softer GDP growth and slower wage growth tempering inflationary pressures, UK interest rates are likely to remain unchanged until the end of this year.
“Our view on the global economy remains largely unchanged: India is a beacon among emerging markets, with growth likely to remain around 7% in 2016 and 2017, outpacing China (5.7% in both 2016 and 2017).
“Both the elephant and the dragon will make a large contribution to global growth in the years ahead. However, some emerging markets remain vulnerable to low commodity prices, large debt overhangs and capital outflows.”
Growth in advanced economies will remain solid, with the US on a firm trajectory (with growth at 2.3% for 2016 and 2017) and the Eurozone’s recovery continuing to move in the right direction (predicted growth of 1.7% in 2016 rising to 1.9% in 2017).
Meanwhile, inflation should still gradually rise towards the Bank of England’s 2% target by mid-2017, but the further fall in commodity prices mean it will remain lower in the near-term for longer. For these reasons interest rates are unlikely to move before the end of the year.
Finally, the CBI expects house price inflation to slow as interest rates increase, with house prices rising by 6.4% in 2016, slowing to 2.8% in 2017.