Revising down its GDP growth forecast to 1.3%, from 2% in the previous forecast, CBI predicts a weaker economic performance next year after the Chancellors Autumn Statement.
The business group’s growth forecast in 2016 is unchanged at 2%, reflecting a stronger first half of the year and resilience in the months since the Referendum.
But subsequent uncertainty is expected to hit business investment, which accounts for a significant element of the downgrade. Furthermore, rising inflation is expected to affect household spending, further curbing economic growth, according to CBI.
The Autumn Statement presents a golden opportunity for the government to build on the Heathrow runway announcement by setting a clear path to drive the economy forward by stimulating investment and reducing uncertainty.
Rain Newton-Smith, CBI chief economist, believes that certainty and stability, vital ingredients that allow businesses to invest and create jobs across the UK, have been absent since the vote to leave the EU.
Newton-smith says, ‘Now, with the economic outlook tempered, business leaders will be looking to the Chancellor to incentivise investment and instil confidence when he delivers his Autumn Statement.
‘Re-invigorating innovation, for example by targeting 3 per cent of GDP joint public and private expenditure on R&D by 2025, will help to increase productivity and raise prosperity right across the UK.’
He adds, ‘Successfully delivering on an ambitious domestic agenda is now more important than ever against the backdrop of forthcoming UK-EU negotiations, where the only certainty is their complexity.’
The UK’s economic fundamentals are solid, as evidenced by last week’s data showing stronger than expected GDP growth in Q3 (of 0.5 per cent). But the CBI expects growth to nudge lower in 2018 as household spending growth softens.
A more tepid outlook for households is partly due to a faster pick-up in inflation. The CBI expects CPI inflation to breach the Monetary Policy Committee’s 2 per cent target in the second quarter of 2017, rising to 2.4 per cent by the end of next year. The unwinding of previous falls in fuel prices are expected to raise inflation, with the post-Referendum fall in the Pound exacerbating this rise relative to our last forecast.
In contrast, wage growth has remained stubbornly below pre-crisis levels and is expected to remain unimpressive, with average earnings growth edging only slightly higher in 2017 (2.4 per cent) and in 2018 (2.6 per cent). With the squeeze on real incomes set to tighten, consumer spending growth will fall by more than half next year (from 2.7 per cent in 2016 to 1.2 per cent in 2017) and again in 2018 (to 0.6 per cent).
Newton-Smith, adds, ‘The UK economy was on firm footing going into the Referendum and it’s vital that we now seek to preserve these economic strengths.
‘Retailers are particularly concerned about how consumers will react to rising inflation next year.
He concludes, ‘Uncertainty means that business investment will remain flat next year before contracting in 2018, and downside risks to our forecasts are even more acute.’