CBI upgrades growth forecast but warns political risk could hold back investment
12 May 2014 10:47 AM
Growth predicted to rise to 3.0% in 2014 and CBI unveils
businesses’ priorities ahead of 2015 general
election.
The CBI today upgraded
its forecast for GDP growth as the recovery continues to take hold. But it
warned politicians of all shades to put incentivising business investment ahead
of short-term electioneering.
The
UK’s leading business group is forecasting GDP growth of 3.0% in 2014, up
from the previous forecast of 2.6%, and 2.7% in 2015, up from
2.5%.
The
economy grew by 0.8% in the first quarter of 2014 and quarter-on-quarter GDP
growth of 0.7% is expected for the rest of this year and next.
Read
the full forecast
Yet
while economic signs are encouraging, the CBI said political uncertainty
remains a major risk to the recovery. Setting out its headline priorities one
year out from the general election, the CBI urged politicians to stick with
what’s working and tackle the UK’s long-term economic
challenges.
Among the measures the CBI is calling for are committing
to eliminate the budget deficit, scrapping the immigration target and raising
the tier 2 visa cap, ensuring big infrastructure decisions are taken with a
long-term strategic view and avoiding damaging market interventions.
John Cridland, CBI Director-General,
said:
“The UK now has more stable economic foundations,
and political risks must not jeopardise this.
“The recovery is advancing after a strong
performance in the first quarter of 2014. Prospects are bright and we expect
the recovery to broaden out this year, with greater support from business
investment in particular.
“Businesses recognise the realities of election
time but want all parties to ensure their policies make a positive difference.
Politicians must be wary of the risk of headline-grabbing policies that weaken
investment, opportunity and jobs.”
While the recovery in 2013 was largely driven by
consumer spending, there are now encouraging signs of growth becoming more
broad-based. Business investment is recovering, and in the final quarter of
2013 it was 8.7% above its level a year ago. Uncertainty over demand conditions
has been falling and business confidence has been improving. The CBI expects
business investment growth of 8.3% this year and 9.1% next
year.
However, net trade is unlikely to provide much support
to GDP growth. While the UK’s export performance is expected to
strengthen as global growth picks up, stronger domestic demand will boost
imports. The CBI therefore expects to see only small support to growth from net
trade in 2014 and 2015.
Momentum in household spending should fade somewhat
later this year as improvements in consumer confidence are unlikely to improve
at the same pace. But a recovery in real wages and productivity will
increasingly provide a firmer footing further ahead and that means consumer
spending is expected to grow by 2.4% overall this year and
next.
The
higher GDP growth forecast means the CBI is bringing forward its estimated date
of an interest rate rise to the first quarter of 2015, when it is forecasting
the first 0.25 percentage point increase.
The
CBI expects unemployment to average 6.8% (2.21 million) this year and to have
fallen to 6.2% (2.02 million) by the end of 2015.
On
housing, the UK has seen a steady increase in house prices. While housing
transactions remain 29% below their 2006 pre-crisis peak, they are picking up
firmly. London house prices are 25% above their peak in 2008, but prices for
the rest of the UK (excluding London) are still 2% below their pre-recession
high.
House price inflation is expected to rise to 8.2% this
year (from 3.6% in 2013) and 5.1% next year.
Mr Cridland added:
“We have to remain alert to the risks posed by
unsustainable house price inflation, and the Financial Policy Committee is
poised to act when necessary.
“Housing has come back under the spotlight as
annual house price inflation figures have reached double digits on some
measures. While housing transactions are still running almost 30% below their
last peak in 2006, they are picking up steadily.
“Although London house prices have risen 25% above
the 2008 peak, this has in part been fuelled by foreign cash buyers. Outside
London, prices remain around 2% below peak figures with an even greater
difference when you move outside the South East.”
Katja Hall, CBI Chief Policy Director,
said:
“We’re a year away from the general election
and politicians must stick with what’s working. That means the new
government, of whatever colour, keeping the deficit reduction strategy on
track. It must also tackle the UK’s economic challenges and not duck the
tough decisions, such as reforming public services.
“Political positioning must not be allowed to
stifle investment, whether it’s an unrealistic immigration target,
unjustified interventions into specific markets, flirting with leaving the
European Union, delaying vital long-term infrastructure projects or restricting
labour market flexibility.
“Pre-election pledges should not deter overseas
and home-grown investors and entrepreneurs, nor limit a future
government’s ability to deliver prosperity in the
UK.”
The
CBI believes businesses must be at the heart of delivering prosperity for all,
and ahead of the 2015 general election has outlined three headline areas which
it’s urging political parties to take into account as they develop
manifesto policies:
1. Stick with what’s working from this
parliament – don’t create unnecessary
uncertainty
Progress has been made during this parliament on making
the UK a more attractive investment location and businesses don’t want to
see positive steps reversed. The new government – of whatever colour
– should build on progress and:
- Commit to a deficit reduction strategy that aims to
eliminate the budget deficit and reduce national debt as a share of
GDP
- Protect our flexible labour market
- Ensure the skills system best prepares people for
work.
2. Tackle the UK’s long-term economic
challenges – don’t duck the tough
decisions
The
next government will take on the responsibility of addressing major challenges
facing the nation and decisions should not be detrimental to the UK’s
economy. Key actions will include:
- Commit to the recommendations of the Davies Commission
on aviation capacity
- Make a renewed push on housing supply to meet the urgent
need for homes
- Deliver renewed public service reform through better
contract and market management.
3. Ensure policies make the right kind of
difference – don’t put politics before investment and
opportunity
Businesses are pragmatic and recognise the realities of
election time but want to see policies that will make a positive difference to
investment and opportunity. These include:
- Scrap the unhelpful migration target and be prepared to
raise the tier 2 skilled visa cap as the economy recovers, and consider
expanding tier 1 for the most skilled individuals
- Structure public spending around a growth focussed
fiscal strategy
- Improving the functioning of markets through setting a
framework to encourage long-term investment and allowing the independent
competition authority and economic regulators to do their job, free from
political interference.
The
CBI will publish its proposals in full later in the
year.