‘Weak productivity and wage growth’ hampering economy

The British economy will grow more slowly than expected on the back of “weak productivity and wage growth”, a report has said.

The outlook for 2016’s GDP growth has been downgraded from 2.6% in November to 2.3%, while 2017 will now hit 2.1% instead of 2.4% , according to forecasts by the Confederation of British Industry.

The CBI has revised down its predictions in its latest quarterly forecast, stating revisions in historical data show there was less momentum in the 2015 economy than previously thought.

It also expects GDP to be hampered by weak productivity and wage growth, triggering a slower rise in household spending.

But the industry body said UK economic growth will remain “solid” amid market volatility and slower global growth, maintaining its position as one of the fastest-growing advanced economies in the world.

It said the UK’s “direct exposure” to the weak global economic outlook was “limited”.

The gloomier prediction for UK growth comes a week after the Bank of England slashed its growth forecasts for UK GDP.

The central bank cut its forecast for the next three years to 2.2% in 2016, 2.4% in 2017 and 2.5% in 2018, as all nine members of the Monetary Policy Committee voted to keep interest rates on hold at 0.5%.

CBI director-general Carolyn Fairbairn said despite domestic demand “remaining healthy” the forecast took into account the “growing overseas risks”.

She also cited Britain’s referendum over its EU membership as a potential threat to its economic growth.

She added: “Overall, the UK economy is expected to see decent growth this year and in the next. It’s important to keep global economic challenges, such as recent stock market volatility, in perspective.”

The report pointed to weak pay and productivity growth despite a strong increase in jobs as a key factor in its downgrade for UK GDP.

It has also revised down its predictions for household spending growth in 2016 to 2.7% compared to 2.9% forecasted in November, with 2017 now set for 1.8% instead of a previous forecast of 2.2%.

The CBI’s outlook for net trade was also revised from its forecast of 0.3 percentage points (ppts) in November last year to 0.5ppts.

It also expects the outlook for investment to be slightly weaker in 2017, as lower household incomes hold back housing investment and slower GDP growth “bears down” on business investment.

Rain Newton-Smith, CBI director for economics, said falls in commodity prices will keep inflation lower in the “near-term for longer”, but it will “gradually rise” towards the Bank of England’s target of 2% by mid-2017.