Interest rates on course to rise early in 2015 given the pace of the UK’s economic recovery says the CBI

12th May 2014

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Interest rates are now on track to rise earlier than generally expected in 2015 given the current pace of the UK’s economic recovery says the CBI, writes Philip Scott.

The prominent British business lobby has today upgraded its GDP growth forecast as the rebound continues to take hold and now expects the UK economy to expand by 3% in 2014, up from the previous forecast of 2.6%. It has also revised up its expectations for 2015, from 2.5% growth to 2.7%.

The economy grew by 0.8% in the first quarter of 2014 and quarter-on-quarter GDP growth of 0.7% is expected for the rest of this year and next.

The higher GDP growth forecast means the CBI is bringing forward its estimated date of an interest rate rise to the first quarter of 2015, when it is forecasting the first 0.25 percentage point increase.

But despite the more upbeat forecasts, the CBI has warned that political risk remains a very real threat to the recovery and has urged that all parties must put incentivising business investment ahead of short-term electioneering.

READ MORE: UK economic growth set to surpass its 2008 peak within months

Among the measures the CBI is calling for are committing to eliminate the budget deficit, scrapping the immigration target and ensuring big infrastructure decisions are taken with a long-term strategic view.

John Cridland, CBI director-general, says: “The UK now has more stable economic foundations, and political risks must not jeopardise this. The recovery is advancing after a strong performance in the first quarter of 2014. Prospects are bright and we expect the recovery to broaden out this year, with greater support from business investment in particular.

“Businesses recognise the realities of election time but want all parties to ensure their policies make a positive difference. Politicians must be wary of the risk of headline-grabbing policies that weaken investment, opportunity and jobs.”

While the recovery in 2013 was largely driven by consumer spending, there are now encouraging signs of growth becoming more broad-based say the CBI. It highlights that business investment is recovering, and in the last three months of 2013, it was 8.7% above its level a year earlier while uncertainty over demand conditions has been falling and business confidence has been improving. As a results the CBI expects business investment growth of 8.3% this year and 9.1% in 2015.

However, net trade is unlikely to provide much support to GDP growth. While the UK’s export performance is expected to strengthen as global growth picks up, stronger domestic demand will boost imports. The CBI therefore expects to see only small support to growth from net trade in 2014 and 2015.

The CBI expects unemployment to average 6.8% (2.21m) this year and to have fallen to 6.2% (2.02m) by the end of 2015.

In regards to UK house prices, while the CBI asserts that transactions remain 29% below their 2006 pre-crisis peak, they are however picking up firmly, noting that London house prices are 25% above their peak in 2008. Prices for the rest of the UK (excluding London) are still 2% below their pre-recession high.

Cridland adds: “We have to remain alert to the risks posed by unsustainable house price inflation, and the Financial Policy Committee is poised to act when necessary. Housing has come back under the spotlight as annual house price inflation figures have reached double digits on some measures. While housing transactions are still running almost 30% below their last peak in 2006, they are picking up steadily.

“Although London house prices have risen 25% above the 2008 peak, this has in part been fueled by foreign cash buyers. Outside London, prices remain around 2% below peak figures with an even greater difference when you move outside the South East.”

The CBI update follows the last week’s report from influential think-tank the National Institute of Economic and Social Research (NIESR) which raised its own growth forecast for the UK economy. The organisation now expects Britain’s gross domestic product (GDP) to grow by 2.9% in 2014, 0.4% higher than its February estimate. It has also lifted its growth forecasts for 2015 through to 2017 to about 2.4%.

The NIESR say that after only marginal expansion in 2012, economic growth has since accelerated rapidly, and is now running at around 3% year-on-year, Jack Meaning, an economist at the group says: “This means that GDP will exceed its previous peak in 2008 in the next few months.”

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