‘Twin-engined’ economy will drive growth, says CBI

Rising household spending and robust business investment will help to fuel a “twin-engined” boost from the UK economy, the CBI said today as it raised its growth forecasts for this year and next.

Picture: John Devlin

Although the employers’ organisation does not expect any support from global demand, it predicted that continued low inflation from falling commodity prices would give a “welcome” uplift to household spending, while business investment was forecast to remain “healthy”.

As a result, CBI director-general John Cridland said it has lifted its GDP growth forecast for this year to 2.6 per cent – up from the 2.4 per cent increased predicted in June – rising to 2.8 per cent in 2016, ahead of its earlier estimate for the year of 2.5 per cent.

Cridland said: “We’re encouraged by the twin-engined growth of household spending, spurred by stronger wage increases and low inflation, buttressed by business investment. We’re also seeing tentative signs of productivity picking up.”

However, Cridland said the outlook for exports was “somewhat muted”, with the strong pound hampering competitiveness abroad, while growth in the eurozone was expected to remain subdued for the foreseeable future.

The CBI is forecasting GDP growth to average 0.7 per cent a quarter until the end of 2016 – in line with the expansion seen in the second quarter of this year, when it bounced back after slowing to 0.4 per cent in the first three months.

On Friday, the Office for National Statistics will to publish its second estimate for second-quarter GDP, with economists widely expecting an unchanged reading.

Alongside stronger household spending, the CBI has upped its estimate for business investment growth this year to 6.2 per cent, compared with its earlier forecast of 4.5 per cent, on the back of stronger-than-expected data for the first quarter and a raft of surveys pointing to upbeat capital spending in the year ahead.

Rain Newton-Smith, the organisation’s director for economics, said: “Strong domestic demand and upbeat official data since our last forecast has boosted our outlook for 2015. We expect this strength to continue into next year, with government consumption now providing a small uplift in 2016 too.

“But pipeline inflationary pressures are building, due to stronger domestic demand and recovering wage growth. Our members are talking more about capacity constraints and skills shortages. Along with more hawkish noises from the Bank of England’s monetary policy committee, we now expect the first quarter of 2016 is the time for that first, very gradual, increase in interest rates here in the UK.”

The CBI had previously predicted the central bank would make a move to 0.75 per cent in the second quarter of next year, having kept rates at a record low of 0.5 per cent since March 2009.

In contrast with its upbeat outlook for the UK, the organisation has trimmed its forecast for Chinese growth this year to 6.3 per cent, down from 6.9 per cent in June, falling to 5.7 per cent in 2016.

Newton-Smith said: “It’s important to remember, however, that even if China only grew by 5 per cent this year, that’s the same as adding an economy the size of Belgium to the global economy each year. And China’s transition away from credit-fuelled investment growth to a more consumer-orientated economy provides plenty of opportunities for British businesses.”