Economic growth expected to stay steady but subdued says new report

Alpesh Paleja, CBI Principal Economist

UK economic growth is expected to stay steady but subdued over the next couple of years, according to the latest CBI Economic Forecast.

The tepid growth seen in 2017 is set to continue. The CBI’s view remains similar to that in June 2017, with the business group forecasting that GDP will grow at a rate of 1.5% for 2017, 1.5% in 2018 and 1.3% in 2019.

The CBI expects quarterly GDP growth of a subdued 0.3% up to the end of 2019 – unchanged from June and almost half the average rate of growth seen since 2013.

Rain Newton-Smith, CBI chief economist, said: “After a timid 2017, UK economic growth is set to remain steady but sluggish, with less pep than we’ve seen over the past few years.

“We expect domestic demand to remain soft.  Household spending will remain under pressure from squeezed real wages and Brexit uncertainty will weigh on business investment. But encouragingly, we should see more support from net exports, buoyed by the lower pound and a resurgent global economy.

“The lacklustre rates of growth that we’re expecting come against the backdrop of several years of persistently weak productivity, which is pushing down on the UK’s supply potential. The Government’s newly announced Industrial Strategy can help address this challenge and boost living standards. But the recent White Paper is just a first step – consistency and determination is needed to make this a long-lasting success.

“If the Industrial Strategy is to deliver better living standards, the UK needs a good Brexit.  There is no point putting your foot to the floor on an Industrial Strategy while slow Brexit talks apply the brakes.  It is already clear that Brexit is affecting business investment plans, and companies are having to prepare for a “no-deal” scenario. Therefore, it is vital that progress is made in negotiations with Brussels, particularly in providing more clarity around transitional arrangements, so we can start to shape our new relationship with the EU.

“Failure or deadlock would have an immediate impact on people’s lives – it’s time to put people and prosperity above political point scoring.”

Following the Bank of England interest rate rise in November, the CBI expects a further three rate rises, each of 25 basis points, over this forecast – in Q3 2018, and in Q2 and Q3 2019.  However, this would still leave interest rates relatively low at 1.25%. Taking into account the Bank of England’s £435 billion stock of asset purchases (which the CBI expects to remain in place), monetary policy remains loose over the forecast period.

The CBI expects CPI inflation to have peaked at 3% in October 2017, and thereafter expects it to ease gradually, though it does remain above the Monetary Policy Committee’s 2% target throughout our forecast. However, with only a lukewarm pick-up in wage growth expected, living standards are set to stay under pressure.

The global economy has been growing strongly, and the CBI expects its momentum to remain solid, providing a supportive backdrop for economic growth in the UK. The CBI expects the global economy to grow by 3.6% in 2017, 3.7% in 2018 and 3.4% in 2019 (on a purchasing power parity basis). The CBI has upgraded its forecast for Eurozone growth in particular, with the recovery across several countries having picked up pace.

The UK outlook remains subject to a high degree of downside risk – particularly in 2019, where a more disorderly outcome from Brexit negotiations could disrupt the economy and financial markets.

Alpesh Paleja, CBI principal economist, said: “The global economy is firing on all cylinders, with the upturn in growth becoming more broad-based. We expect this to continue in the near-term, which will provide a supportive backdrop for trade and economic growth in the UK. Coupled with a lower pound, now is a good time for businesses to look at new exporting opportunities across the world.

“But for firms to really plan and capitalise on these opportunities over the longer-term, urgent clarity is needed on the UK’s new relationship with the EU – underscoring the need for momentum in the negotiations.”

The key drivers of the CBI’s Economic Forecast are:

  • This forecast assumes that agreement with the EU on a time-limited transition period is reached sometime in Q1 2018, and is implemented upon the expiry of Article 50 in March 2019. This ensures a relatively smooth transition to a new relationship with the EU
  • Uncertainty around Brexit will weigh on business investment growth, particularly over 2018. This chimes with CBI surveys conducted this year, where around 40% of businesses cited Brexit as having an impact on their investment plans
  • Real household incomes will be squeezed by relatively high inflation and only a gradual pick up in wage growth, which weighs on household spending
  • Net trade is expected to provide more support to the economy further ahead, boosted by a lower pound and strong global growth.