By Daniel Hunter
The CBI has raised its growth forecasts for 2013 and 2014 as the recovery begins to gather some short-term momentum. But the rebalancing away from consumption towards investment and trade is taking longer than expected.
The UK’s leading business group is forecasting GDP growth of 1.2% in 2013, up from 1.0% in its May forecast, after a better than expected second quarter and signs of a pick-up in confidence across a broad range of sectors, including services, construction and manufacturing.
In 2014, the CBI expects the economy to gather pace, forecasting 2.3% GDP growth up from 2.0% in May, as disposable income increases and business and housing investment support domestic demand. A return to growth in the Euro area and broader global recovery will give a positive boost to exports, but imports will also grow as the UK’s domestic situation improves, so the trade contribution to growth will remain small. The Bank’s forward guidance should add to the recovery in business and consumer confidence.
“The economy has started to gain momentum and confidence is picking up, but it’s still early days," John Cridland, CBI Director-General, said.
“We need to see a full-blown rebalancing of our economy, with stronger business investment and trade before we can call a sustainable recovery. We hope that will begin to emerge next year, as the Eurozone starts growing again.
“The Government needs to get behind talented UK businesses to help them break into new export markets and sell great British products and services around the globe.”
Modest rebalancing in growth expected
Household spending is expected to slowly strengthen in the second half of 2013 and through 2014, as confidence lifts and credit conditions continue to improve. This will be increasingly supported by improving spending power as inflation gradually falls back and disposable income picks up, against the backdrop of a stable labour market.
Meanwhile, business investment and exports are forecast to strengthen as the global economy picks up and the Eurozone returns to growth, confidence rises, and credit conditions continue to improve. Business investment is forecast to grow by 7.3% in 2014 from -2.8% in 2013. Export growth is expected to increase from 0.7% in 2013 to 4.9% in 2014, but the net contribution of trade to GDP growth will remain muted as domestic demand boosts import growth from -0.8% in 2013 to 4.4% in 2014.
Interest rates on hold beyond 2014
The CBI forecasts that the unemployment rate will be 7.8% in 2013, falling to 7.6% in 2014. We expect unemployment to be relatively sticky over the medium-term, as hours worked increase and productivity begins to recover. Consequently, the CBI expects interest rates to remain on hold beyond 2014.
“Increased confidence, improved credit conditions and a pick-up in disposable income should underpin consumer spending in the UK through 2014," Stephen Gifford, CBI Director of Economics, said.
“As the Eurozone returns to growth and global momentum continues to build we should see a gradual increase in business investment and UK trade.
“But despite a relatively stable global environment over the last year, risks remain as financial markets move to a new regulatory environment and the Eurozone continues to evolve. Meanwhile, emerging markets are facing structural challenges, particularly as China rebalances towards domestic consumption, which indicates muted growth prospects.”
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