WIREDGOV

The UK economy is on a firm footing with steady growth forecast into 2016, but a major risk to the recovery is the challenging global outlook, particularly in the Eurozone. That’s according to the CBI’s latest economic forecast, published on the eve of its flagship annual conference (Sunday).

The UK’s leading business group is forecasting 3.0% growth in 2014, unchanged from September, and 2.5% in 2015, compared with 2.7% previously. For the first time the CBI is publishing forecasts for 2016 with solid growth of 2.5% predicted.

Download the full November 2014 CBI Forecast here

The UK has seen the fastest GDP growth rates in the G7 since the beginning of 2013, a track record it is predicted to match in 2014. This is on the back of a robust rise in consumer spending and strengthening business investment. After expanding by 0.9% in the second quarter of 2014, GDP growth stood at a robust 0.7% in Q3, and is expected to steady to 0.6% in Q4 and the first quarter of 2015.

However, the UK’s export performance remains disappointing. With the global backdrop becoming significantly more challenging, our business surveys have shown that a fall in export orders is weighing particularly on manufacturers. Export growth is expected to slide into the red this year (-1.0%) before picking up next year (3.6%) and strengthening further in 2016 (5.7%). We are watching developments in the Eurozone and the global economy closely, as any further economic disappointments could present a serious risk to our export growth.

John Cridland, CBI Director-General, said:

“The recovery is on firm ground and is becoming more ingrained. After a strong start to the year, we expect growth to get onto an even keel in 2015 and 2016.

“The service sector has held up well and we’ve seen an encouraging pick up in business investment, with firms looking to boost IT spending, while consumer spending is holding up as the UK economy continues to create jobs.

“However, while the domestic picture is strong, the global backdrop is choppier. We are facing a heady mix of sluggish Eurozone growth, heightened tensions in Russia, Ukraine and the Middle East, and softening emerging markets, particularly in China, which could dent our export ambitions.”

Following revisions to official data, business investment recovered sooner than expected. It stood at 3% above its pre-crisis peak at the start of 2014, and we expect strong growth of 8.5% this year, and 6.5% and 6.3% in 2015 and 2016 respectively. While this is a slight downgrade on September, the UK recovery is now more balanced and strong rates of business investment bodes well for our future potential.

CPI inflation is set to remain below the 2 percent target this year and next (1.5% in 2014 and 2015), while wage growth is expected to stay relatively muted. This year wages are expected to grow by 0.9%, rising to 2.0% in 2015 and to 2.9% in 2016. Subdued wage growth reflects weakness in productivity, but we expect wages to pick up as confidence in the recovery broadens and people start moving jobs more readily.

There continues to be strong growth in the labour market, with youth unemployment falling in recent months. The headline unemployment rate is forecast to average 6.2% this year (with 2 million unemployed), falling to 1.82 million or 5.6% in 2015 and to 1.74 million or 5.3% in 2016.

Given the benign outlook for inflation, the CBI is now forecasting the first interest rate rise will happen in the second quarter of 2015, compared with the first quarter of 2015 in its September forecast.

Meanwhile, house price inflation is expected to rise to 10.1% this year, and then moderate to 5.8% in 2015 and 3.5% in 2016.

Rain Newton-Smith, CBI Director of Economics, said:

“The global backdrop is a big risk to the otherwise solid outlook for the UK’s economy. We expect the UK to settle back close to trend growth rates, and for inflationary pressures to stay subdued. Partly as a result, we now expect the first rise in interest rates towards the middle of 2015.

“However, the rise in interest rates is likely to be gradual. Even by the end of 2016, the stance of monetary policy will remain loose, allowing it to provide a bit more breathing space for the recovery.”