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Britain’s biggest business group unveils first 2017 forecast

The UK economy remains resilient in the face of wider fears for global growth, the CBI said today, as it unveiled its latest quarterly economic forecast on the morning of its Annual Conference.

The flagship event, held at Grosvenor House Hotel in London, will be attended by senior business leaders from firms of all sizes and sectors, as well as senior politicians.

The CBI’s quarterly forecast reveals solid growth, despite a modest downgrade for 2015, from 2.6% in August to 2.4%. This reflects weaker investment growth, driven largely by recent changes to official data. Next year the business group expects the UK economy to grow at 2.6%, down from 2.8%, as a somewhat gloomier global outlook means that net trade will drag on growth. 

Concerns over the global economy have been flagged by the Monetary Policy Committee - consequently, the CBI now believes an interest rate rise is likelier Q2 next year, rather than Q1 as predicted in the business group’s previous forecast.

The leading business group also unveiled its first forecast for 2017, predicting solid UK growth at 2.4%, with a gradual rise in inflation easing household spending.

John Cridland, CBI Director-General, said: 

“The UK economy’s continued strong performance is a clear sign of its resilience in the face of turbulent times overseas.

“Manufacturers are enduring tougher conditions, as a persistently strong pound is hamstringing our export competitiveness, alongside dampened global growth. But our domestic story is strong and overall we are now in a phase of stable but solid economic growth. 

“Mark Carney, the Bank of England Governor, has already signalled that an interest rate rise will be limited and gradual when it comes. We know that businesses are prepared for this.

"Overall we must continue to put solid foundations in place to support the economy. That means ploughing ahead with critical infrastructure decisions, such as aviation capacity, maintaining flexibility in our labour market and keeping an open door to businesses and talent from abroad that create jobs and boost our economy.

“Tackling these issues is just as important for businesses as securing reform in the European Union and is crucial for the UK to meet its global ambition in the face of stiff competition.”

The CBI forecast shows little boost is expected from growth abroad, with net trade registering a neutral contribution to growth this year (+0.1%) and acting as a drag in 2016 (-0.3%). This in part reflects a downgrade to export growth, from 4.5% to 2.2% in 2015, with a similar pace of export growth set in 2016 (2.2%, weaker than the 3.4% we expected in August). But it also reflects resilient rises in imports, driven by firms’ domestic demand.

Recent downward revisions to business investment data have only limited implications for the UK domestic outlook, with survey data on investment intentions for the year ahead remaining solid outside the manufacturing sector, where plans for spending remain muted.

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

“Although China’s slowdown spooked financial markets this summer, businesses are in China for the long-haul. Strong consumer demand in China is offsetting some of the excess capacity in manufacturing and will present new opportunities for business. But with the US Federal Reserve’s decision in December finely balanced, UK firms will be keeping a sharp eye on the effect it might have on emerging markets and confidence in the global economy, which could have a more tangible impact on the UK’s trade position.

“At home, the UK’s fundamentals are strong. Investment growth remains firm, accounting for around a quarter of the UK’s expansion this year, and roughly a third in both 2016 and 2017. Household spending is the mainstay of growth, underpinned by improving wages and low inflation, against a backdrop of low oil prices.”

Slower economic growth in China will likely weigh further on emerging markets, particularly those reliant on commodity exports. And while the latest official GDP growth in China (at 6.9%) was stronger than expected, this has not changed the CBI’s GDP growth forecast of around 6.2% this year. We share concerns raised by other commentators regarding the accuracy of official Chinese data, which could be masking the extent of the country’s slowdown.

India remains a bright spot among more downbeat emerging markets, with the CBI forecasting strong growth ahead. In contrast, the outlook for advanced economies is holding up well, with the US expected to grow by 2.6% in 2016 and a buoyant outlook for domestic demand in France helping to lift growth to 1.5% next year.

Meanwhile, the UK labour market recently resumed its improving trend. Companies are continuing to hire, but the CBI sees a slower pace of jobs growth ahead as productivity gradually picks up, with the unemployment rate likely to level out in 2017 (at 5.1%). 

While job creation will ease, stronger pay growth of 3.2% in 2016 will boost prospects for households. The CBI also expects inflation to pick up from the end of the year, moving towards the Bank of England’s target of 2% from mid-2017 onwards.

Finally, the CBI expects house price inflation to slow as interest rates increase, with house prices rising by 6.0% in 2015, slowing to 3.9% in 2016 and 3.5% in 2017.