CBI downgrades GDP growth forecasts

The CBI has downgraded its GDP growth forecast for both 2016 (to 2.3%, from 2.6% in November) and 2017 (to 2.1%, down from 2.4%).

Related topics:  Finance News
Rozi Jones
12th February 2016
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The modest adjustments for 2016 are driven chiefly by revisions to historical data, which show that momentum in the economy over 2015 was slightly less than previously thought. Weak productivity and wage growth, leading to a slower rise household spending, is also a factor.

But while the global economic outlook is weaker, particularly given concerns over China and its effect on emerging markets, the UK’s direct exposure is limited.

The CBI also predicts that inflation will gradually rise towards the Bank of England’s 2% target by mid-2017, but the further fall in commodity prices mean it will remain lower in the near-term for longer. For these reasons, the CBI says that interest rates are unlikely to move before the end of the year.

Finally, it expects house price inflation to slow as interest rates increase, with house prices rising by 6.4% in 2016, slowing to 2.8% in 2017.

Carolyn Fairbairn, CBI Director-General, said:

“The UK is likely to remain among the fastest growing advanced economies with strong fundamentals, though our forecast recognises growing overseas risks.

“While there’s little current evidence of uncertainty negatively affecting business investment ahead of the EU Referendum, this is a potential risk to the UK’s solid economic outlook, along with concerns over China and emerging markets.

“And despite domestic demand remaining healthy, it’s clear that increasing productivity remains a priority as a means of achieving sustainable wage growth.

“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.”

Rain Newton-Smith, CBI Director for Economics, added:

“It’s important to remember is that the UK has largely remained resilient amid recent global turbulence. We have a sound economic footing at home, driven by strong job creation and business investment coupled with low inflation supporting household spending.

“But with softer GDP growth and slower wage growth tempering inflationary pressures, UK interest rates are likely to remain unchanged until the end of this year."

Kevin Caley, Founder and Chairman of ThinCats, commented:

“The Chinese slowdown and fears over Brexit are concerning the CBI, which is downgrading its forecasts for growth, but in reality restricted business lending by the banks is a much greater constraint on growth. As long as the banks continue to constrain lending to businesses, production will be hampered, wage inflation will slow and growth will be stymied, delaying hopes of a full economic recovery.

“Small and medium sized businesses are the bedrock of the economy and many that have the opportunity to expand simply aren’t getting the support they need because of the continued shortfall in bank finance. Even the emergence of the challenger bank movement is failing to address this. If we want sustained growth, businesses need funding now. The new Innovative Finance ISA is set to transform the peer-to-peer market by more than doubling the funds available to invest over the next year.”

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