Increased household spending and investment expected
HOUSEHOLD spending is set to rise and a firmer rate, accompanied with strong investment growth making a "twin engined" growth in the economy, a leading business body has forecast.
The Confederation of British Industry (CBI) is forecasting 2.6 per cent GDP growth for 2015, up from 2.4 per cent in June, and 2.8 per cent in 2016, up from 2.5 per cent.
The upgrade is due to a combination of factors, including signs of recovering productivity in the first half of this year feeding through to stronger wage growth.
Combined with continued low inflation from falling commodity prices, this gives a welcome boost to household spending. Furthermore, business investment is also likely to remain healthy, with our surveys indicating robust plans for capital spending.
As a result, we expect decent quarterly GDP growth ahead: we anticipate growth to average 0.7% a quarter until the end of 2016, in line with the expansion seen in Q2 2015.
Although domestic growth looks solid, we do not expect any support from global demand. While immediate Eurozone risks appear to have receded compared with earlier in the year, a weaker outlook for China will weigh on global growth and a strengthening pound will eat into UK export competitiveness. Meanwhile, downside risks to emerging market growth appear to have intensified. As a result, net trade looks set to drag on GDP growth in both 2015 and 2016.
John Cridland, CBI director general, 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.
“But the outlook on exports is somewhat muted: the strong Pound is hampering our competitiveness abroad and growth in the Eurozone, our biggest trading partner, and will remain subdued for the foreseeable future, particularly given renewed uncertainty.”
Following more hawkish comments from the Bank of England recently, in combination with a bit more growth momentum, we now expect interest rates to rise to 0.75 per cent in the first quarter of 2016, and then rise at a slow pace thereafter. This is earlier than our previous prediction of an increase in the second quarter. Across the Atlantic, the US Federal Reserve looks likely to raise interest rates before Christmas.
Alongside stronger household spending, business investment growth for 2015 has been revised up (to 6.2 per cent from 4.5 per cent in June), following stronger than expected Q1 data and the CBI's suite of business surveys pointing to upbeat capital spending in the year ahead.
Household spending and business investment are set to remain key drivers of growth in 2016 (rising by 2.9 per cent and 6.5 per cent respectively). A small positive contribution from government consumption is also expected (with growth of 0.6 per cent over the year), following the smoother pace of fiscal consolidation announced in the summer budget.