Growth forecast hiked amid rise in confidence

CBI boss John Cridland believes the UK is now seeing the right kind of growth. Picture: Toby Williams

The employers’ organisation said strong domestic demand, underpinned by record low borrowing costs, was also supporting an improvement in confidence among companies.

The upbeat assessment comes a day after Bank of Scotland said growth in the private sector economy north of the Border rose to a three-month high in January, as strong output in the manufacturing and service sectors boosted employment.

CBI director-general John Cridland said UK gross domestic product (GDP) is poised to expand by 2.6 per cent this year, up from the group’s previous forecast of 2.4 per cent. That compares with the 2.5 per cent predicted by UBS Wealth Management and the National Institute of Economic & Social Research.

In a separate report published yesterday, the Organisation for Economic Co-operation & Development (OECD) said the outlook across most of the world’s advanced economies was also improving, while accountant BDO said business confidence in the UK had hit its highest level for 22 years.

Official figures released at the end of last month showed the economy expanded by 1.9 per cent in 2013 – the healthiest rate of growth since before the financial crisis.

Cridland said: “We are starting to see signs of the right kind of growth. In our view this is not a debt-fuelled, housing bubble-led recovery – our forecast shows encouraging signs that business investment and net trade are starting to play their part.”

Spending on advertising and technology is set to grow as firms become more confident about their prospects, and the CBI said there were signs of an increase in mergers and acquisitions as “animal spirits” return to the market.

According to the organisation’s latest forecast, business investment – which contracted by 3.7 per cent last year – will grow 6.6 per cent in 2014, rising to 8.3 per cent the following year.

As growth picks up in the global economy, export growth is predicted to accelerate to 3.6 per cent, more than treble the 1 per cent seen in 2013.

However, Cridland cautioned that political uncertainty ahead of next year’s Westminster elections could be a “mood killer” when it comes to major investment decisions in the months ahead, and the CBI has trimmed its economic growth forecast for 2015 to 2.5 per cent, down slightly from the 2.6 per cent it predicted in November.

With the Bank of England preparing to deliver its quarterly inflation report tomorrow, there are hopes that average earnings growth will start to gradually outstrip that of consumer prices this year, relieving some of the pressure on household budgets. Bank governor Mark Carney is expected to tweak his “forward guidance”. Under the current guidance, the Bank has ruled out a rise in interest rates until unemployment falls to 7 per cent, unless there is a risk of inflation running out of control.

However, the jobless rate fell to 7.1 per cent in the three months to November, and although the CBI believes it has now dipped below 7 per cent, it does not expect an increase in borrowing costs until the third quarter of 2015.