Falling oil prices and slowing inflation have prompted the CBI to upgrade its forecasts for economic growth this year, although it warned that exporters still face a threat from the “shaky” eurozone.
The employers’ organisation today said that the UK economy is expected to expand by 2.7 per cent in 2015, up from its previous prediction of 2.5 per cent.
Rain Newton-Smith, the CBI’s director for economics, said: “The UK is in good shape compared with other economies, with both investment and household spending underpinning economic growth. But there are still risks to exports from a shaky eurozone.”
The CBI cited continued strong job creation and said a pick-up in wages growth was combining with low inflation to boost living standards. Inflation for December was measured at a record-equalling low of 0.5 per cent, while figures for January will be published tomorrow.
The lobby group also said that declining energy prices were feeding through to lower operating costs for companies – although North Sea companies have taken a hit. Oil prices have fallen by around half since last summer.
The CBI said the better picture for the economy also reflected the likelihood that the Bank of England would not raise interest rates from 0.5 per cent until early next year. It expects to see growth of 2.6 per cent for 2016.
However, in an article for a Sunday newspaper, monetary policy committee (MPC) member Martin Weale said that interest rates will “have to rise somewhat earlier than market participants currently expect”, as the central bank’s forecasts show inflation could rise above its 2 per cent target by the middle of 2017.
Although a gradual rise in borrowing costs remains the most likely outcome, Bank of England governor Mark Carney last week said that the MPC stood ready to cut interest rates or re-start its money-printing programme if deflation or very low inflation were to set in.
The CBI also warned today of continued political volatility at home and abroad due to the looming UK general election, Greek debt crisis and stand-off over Ukraine. “As a result, exporters are finding it harder to secure orders and net trade is unlikely to provide much of a boost to growth over the next two years.”
Katja Hall, the CBI’s deputy director-general, added: “UK growth continues to outshine its counterparts in Europe and progress is ‘steady as she goes’.
“While lower oil prices are keeping costs down for businesses and consumers, the North Sea oil companies are suffering, harming jobs and investment in the industry. Now is not the time for complacency, but falling unemployment coupled with improving wage growth and rock bottom inflation should mean that people see more money in their pockets.”
The CBI’s economic forecast brings it into line with the International Monetary Fund’s latest projection. The Bank of England forecasts growth of 2.9 per cent.
A Treasury spokesman said: “The CBI’s latest economic forecasts are further proof our long-term economic plan is working, showing upgrades to UK growth forecasts for 2015 and 2016 with pay cheques growing significantly faster than inflation. This is welcome news for households and families, but the job is not yet done so we must keep working through the plan that is delivering economic security in an uncertain world economy.”
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