UK companies are predicted to invest less this year threatening the Chancellor’s plans to rebalance the budget by 2020, according to the latest ICAEW Economic Forecast.
Fragile business confidence means investment growth is expected to fall from 6.4% in 2015 to 5.2% this year, despite their strong financial positions, adding another ingredient to the 'cocktail of risks' for George Osborne who wants to move the UK away from domestic consumption and credit.
The ICAEW has downgraded its growth for the UK economy from 2.2% to 2% for 2015, as a result of slowing business investment, falling business confidence, volatile financial markets and a fall in capital spending growth.
Its survey found that businesses have weaker motivations to invest due to their growing uncertainty on the economy. Both the forthcoming referendum on the UK’s membership of the EU and the recent turbulence in financial markets have contributed to the uncertain outlook.
After a hiatus in summer 2015, the labour market is showing strong job creation. ICAEW expects employment growth to slow, but the unemployment rate is forecast to fall further to 5.0% in 2016. Pay growth appears to have plateaued. The introduction of the National Living Wage will offer some support for those on low incomes, but more broadly ICAEW expect earnings to grow by 2.8% in 2016, at a similar pace to last year.
Michael Izza, ICAEW chief executive, said: “The Chancellor would have hoped for a more robust economic picture when he presents the Budget next week. A slowdown in the economic recovery, as we are forecasting, will undermine the Chancellor’s public spending plans and goals to return public finances to a surplus in 2020. The fact is, we are still too vulnerable and too reliant on the mini-consumer boom. The boost to spending power enjoyed by consumers last year will steadily fade as inflation gradually picks up, while faltering confidence means that growth in business investment is also likely to cool.
“George Osborne will be forced to adjust his borrowing targets, cut spending further or raise taxes to fix the nation’s finances. It is evidently becoming a three-Parliament problem. The Government is not paying enough attention to the surge of government liabilities which has happened over the last five years. They should have a comprehensive view of the UK’s financial accounts and employ modern financial management taking the global economy into account.”