CBI warns of slower growth as uncertainty hits investment

CBI director-general Carolyn Fairbairn.
Photo : Anthony Devlin/PA Wire

CBI director-general Carolyn Fairbairn. Photo : Anthony Devlin/PA Wire - Credit: PA

The UK economy will continue to grow throughout 2016 and 2017, but at slower rate than previously expected, according to the latest forecast from the CBI.

Global economic risks, combined with uncertainty ahead of the UK’s referendum on membership of the European Union, are starting to weigh on investment plans, the business group says.

Its new quarterly economic forecast predicts that UK Gross Domestic Product (GDP) – a broad measure of economic output – will still grow by 2.0% both this year and next .

But these figures – which assume that Britain remains in the EU – represent downgrades compared with the CBI’s previous report in February, which forecast growth of 2.3% for this year and 2.1% in 2017.

The CBI says that its downgrade for 2016 largely reflects a softer than expected start to the year for the UK economy while there are also concerns for the future, including weaker prospects for China and other emerging markets as well as the outcome of EU referendum.

Carolyn Fairbairn, CBI director-general, said: “We expect the UK’s growth path to continue but it is likely to be at a slower rate than previously thought.

“A dark cloud of uncertainty is looming over global growth, particularly around weakening emerging markets and the outcome of the EU referendum, which is chilling some firms’ plans to invest.

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“At present, the economic signals are mixed – we are in an unusually uncertain period.”

The CBI’s forecast says that household spending will remain a major driver of economic growth, although it is expected to ease, to 2.5% this year and 1.5% in 2017.

This is due, in part, to an expected increase in inflation over the course of the next two years – picking up towards the Bank of England’s target of 2% by early 2017 – which will temper growth in real incomes.

The CBI believes that the timing of the first rise in interest rates since the financial crisis will now be in the second quarter of 2017, with the Bank of England base rate rising from 0.5% to 0.75% against a backdrop of slower growth.

It says that investment spending is likely to ease in the near-term, amid some signs that uncertainty over the referendum is bearing down on plans for capital spending.

However, a recovery in investment is expected in the second half of 2016, so that business investment will remain a key support to growth in GDP over the next two years, accounting for around a quarter of growth in 2016 and a third in 2017.

Once again, however, net trade is not expected to provide much support to growth. While the CBI expects a smaller drag over 2016 as a whole than seen so far this year, this mostly reflects a larger downgrade to import growth rather than much of a recovery in exports.