24th August 2015
A leading business lobby has upped its forecasts for UK economic growth this year and next as a result of better consumer spending and stronger investment growth.
The Confederation of British Industry (CBI) said the two factors will help to fuel faster “twin-engined” growth in the economy and is now anticipating 2.6% GDP growth for 2015, up from 2.4% in June, and 2.8% in 2016, up from 2.5%.
It said signs of recovering productivity in the first half of this year are feeding through to stronger wage growth combined. This coupled with low inflation from falling commodity prices has given a welcome boost to household spending it added.
Overall it expects growth to average 0.7% a quarter until the end of 2016, in line with the expansion seen in the second quarter this year. However it added that while domestic growth looks solid, it does not expect any support from global demand.
In its update, the organisation said: “Eurozone risks appear to have receded compared with earlier in the year, a weaker outlook for China will weigh on global growth and a strengthening pound will eat into UK export competitiveness. Meanwhile, downside risks to emerging market growth appear to have intensified. As a result, net trade looks set to drag on GDP growth in both 2015 and 2016.”
John Cridland, CBI director-general, added: “We’re encouraged by the twin engined-growth of household spending, spurred by stronger wage increases and low inflation, buttressed by business investment. We’re also seeing tentative signs of productivity picking up.”
Following more hawkish comments from the Bank of England recently, in combination with a bit more growth momentum, the CBI expects interest rates to rise to 0.75% in the first quarter of 2016, and then rise at a slow pace thereafter.
Rain Newton-Smith, CBI director for economics, said: “Strong domestic demand and upbeat official data since our last forecast has boosted our outlook for 2015. We expect this strength to continue into next year, with government consumption now providing a small uplift in 2016 too.
“But pipeline inflationary pressures are building, due to stronger domestic demand and recovering wage growth. Our members are talking more about capacity constraints and skills shortages. Along with more hawkish noises from the Bank of England’s Monetary Policy Committee, we now expect Q1 2016 is the time for that first, very gradual increase in interest rates here in the UK.”
Looking at the international backdrop, Newton-Smith added that it even if China only grew by 5% this year, that’s the same as adding an economy the size of Belgium to the global economy each year. “And China’s transition away from credit-fuelled investment growth to a more consumer-oriented economy provides plenty of opportunities for British businesses,” she added.