CBI sees solid and sustainable economic growth ahead

The UK’s leading business group is forecasting 2.4 per cent growth for 2015 and 2.5 per cent in 2016. That represents a slight downgrade compared with February’s forecast of 2.7 per cent and 2.6 per cent respectively, largely due to weaker than expected official GDP data for the first quarter of – 015, which the CBI believes is a temporary blip.

Following first quarter growth of 0.3 per cent, the CBI predicts a strong rebound in the coming months with quarter-on-quarter growth of 0.8 per cent in Q2, 0.7 per cent in Q3 and 0.6 per cent in Q4. This also follows the official upgrade of growth in 2014 as a whole to 2.8 per cent, from 2.6 per cent.

Despite growth prospects looking healthy at home, there are headwinds to the recovery, with a still sluggish Eurozone and renewed uncertainty over Greece’s economic future.

John Cridland, CBI Director-General, said: “The recovery has built up a good head of steam and we expect to see solid, steady and sustainable growth carrying through into next year.

“Our members are feeling more upbeat than some of the recent official numbers suggest, with our surveys showing that retail and the service sectors in particular are performing strongly.

“Businesses on the ground are seeing a pretty solid recovery. Business investment is making a strong contribution to growth, while solid consumer spending is being underpinned by rock bottom inflation, low interest rates and rising incomes.

“Risks remain in the form of economic instability in Greece and a sluggish Eurozone, and clearly the EU referendum is a hot topic in Britain’s boardrooms. Businesses now have certainty that the referendum is happening, but not the outcome. However, most of our members are clear they want to remain in a reformed EU and will get behind an ambitious reform agenda.”

After 2014 saw a flush of business investment growth of 7.5 per cent, it now stands at 8.7 per cent above its pre-crisis peak, while UK firms’ profitability (excluding North Sea companies) –– has risen sharply since mid-2013, underpinning investment. This year, investment is expected to bolster GDP growth further, rising by 4.5 per cent and 6.4 per cent in 2016, as the UK’s expansion presses ahead and borrowing costs remain low. Meanwhile, government consumption is set to fall by 0.7 per cent in 2016 after growth of 1.2 per cent this year.

While a recovery in business investment has helped rebalance the economy on the domestic side, there has not been any material rebalancing on the external front, with little contribution to growth from net trade expected this year and next. The UK’s export performance should improve in 2016, as world growth picks up with the US economy forecast to grow by 2.7 per cent, China by 6.5 per cent and the Eurozone by 1.8 per cent.