12 November 2015
UK labour market powers ahead
The latest labour market data show a strong rise in employment of 177,000 in the quarter to September – the fastest pace of growth since the quarter to March, largely reflecting an increase in the number of part-time employees, writes Anna Leach.
The unemployment rate has also fallen to 5.3% – the lowest since before the crisis – and the employment rate is the highest since records began in 1971 – at 73.7%.
Although regular pay growth has ticked down, total pay has held up better and real pay is still being supported by rock-bottom inflation, lending strength to consumer spending. Going forward, wage growth is likely to be supported by a tightening labour market and rising productivity.
But overall, the labour market is showcasing an economy that seems in good shape.
CBI’s latest forecast is for solid growth over the next few years
The CBI published its latest economic forecast on Monday 8th November, and we are expecting growth of 2.4% this year, 2.6% in 2016 and 2.4% in 2017. Growth in 2016 and 2017 is expected to be fuelled largely by domestic activity, with household spending accounting for around two thirds of growth and investment around one third.
The eagle-eyed among you will have noticed that these figures constitute a downgrade to our August forecast. Back then, we were expecting growth of 2.6% this year and 2.8% next year (our forecast did not yet extend to 2017).
Domestic outlook largely unchanged
The forecast for this year has been pulled down slightly by revisions to past data. These revisions have shaved a little off investment growth in the past, and for this year, with investment growth over the remainder of our forecast also a little gentler.
Our central message is unchanged: the domestic drivers of growth are expected to continue to solidify, with both consumer spending and investment growing at a decent pace. Investment is expected to continue to punch above its weight and productivity should continue to rise, supporting real wage growth and consumer spending.
And businesses are feeling increasingly optimistic about the outlook. Optimism and activity continues to rise across most of our surveys and the retail sector is increasingly feeling the benefit of rising consumer incomes. However, manufacturers are feeling the strength of the pound, and our October Industrial Trends Survey really highlighted the impact this is having on export demand and competitiveness in EU markets.
But global growth prospects have ticked down
Our previous forecast landed amidst a bout of financial market turmoil sparked by developments in China which spilled over into neighbouring markets.
Speculation around when the Fed would lift rates added further fuel to the fire by catalysing a more fundamental reappraisal of economic prospects in the emerging world.
Fast forward to today and the outlook for the global economy has undoubtedly weakened and downside risks to growth have intensified. We have slightly downgraded our growth outlook for China and developments in China could spark further financial market turmoil, as could rate lift-off in the US.
But the developed world is proving resilient so far: the recovery in the Eurozone continues to progress and the US economy is clearly on the up, as last week’s jobs figures illustrate.
We think interest rates will rise mid 2016
In our latest economic forecast, we have published our judgement that interest rates will go up in 2016 Q2, and then rise very gently thereafter – a quarter later than in our previous forecast.
We believe the media commonly misinterpreted the Governor’s stance as being more dovish than the reality and it reflects our judgement that the economy is close to full capacity and that domestic inflationary pressures are beginning to build – our surveys show increasing evidence of skill shortages, implying wage pressures are increasing.
Anna Leach is the CBI's Head of Economic Analysis