Boost for business investment needed to support recovery and unleash UK potential – CBI Economic Forecasts
The foundations for the UK’s economic recovery remain strong despite global supply issues weighing on near-term growth, according to the latest CBI economic forecast.
However, short-term headwinds – including rising costs and shortages – have increased from the business group’s previous forecast in June. Longer-term challenges, including persistently low productivity, underscore the need to stimulate business investment to support sustainable growth.
The CBI forecasts GDP growth of 6.9% in 2021 and 5.1% in 2022, revised downwards by 8.2% and 6.1% respectively. It should be noted that this largely reflects weaker-than-expected earnings data from the previous CBI forecast. The business group’s forecast expects supply chain friction to largely dissipate by the middle of next year. Earlier in the fall, the government formed the Supply Chain Advisory Group to address these issues.
Overall, household spending remains the main driver of GDP growth, generating 90% of growth in 2022 and two-thirds in 2023. This is supported by further improvement in real income and households slowing down. excess savings accumulated during the pandemic.
The resilience of the UK labor market has been a real achievement, in large part thanks to the government’s job retention program, which has prevented potentially large-scale job losses. Continued job growth over the next two years also supports household spending.
Corporate appetite for investment has recovered somewhat and, stimulated by continued economic growth, briefly exceeds its pre-pandemic level at the end of 2022 (8.2% growth over the entire period). ‘year). However, this recovery is short-lived, with lower investment spending starting in mid-2023, as the super-deduction ends and the corporate tax hike kicks in. As a result, the Business investment will lag behind other advanced economies.
The recovery in exports is also expected to be lackluster, after disappointing growth in this year so far.
Forecasts predict that CPI inflation will peak at 5.2% in April of next year. It is expected to stay above the Bank of England’s 2% target until spring 2023, which will hit wages and offset some of the positive foundations in consumer spending.
Tony Danker, Managing Director of the CBI, said: “The January 1 challenge is now very clear for the UK economy. Strong headwinds and the rising cost of living threaten the extent of the recovery and the prospects for economic success. These barriers for business will be a major test for government: can they drive sustainable investment and growth in the UK?
“The UK’s New Year’s resolution must be to give businesses the confidence to grow. We should aim for the potential of the economy and seize the opportunity. “I know, speaking with companies of all sizes, that they have an ambitious investment mindset and that they are eager to execute plans for growth.
“But as intentions have thawed, we are nearing a cliff in 2023. Super-deduction is a welcome catalyst, but one single wonder is not enough to offset four decades of underperforming business investments. We must capitalize on its success with targeted measures encouraging the scale of the investments we need, especially in green technologies. A growth accelerator is needed to protect and strengthen our recovery.
“But it’s not just a challenge for the government. It’s also up to businesses to step in and be part of the solution. Investing in technology and skills is one of the most important steps businesses can take now to boost productivity growth.
“The government has key levers to support businesses: investment-friendly and innovation-friendly regulations to help create new markets, a competitive tax regime that encourages business investment at all levels and new market-making interventions, for example on clean energy. The right mix will pay off in the longer term, boost UK stable productivity and set us on the right track for another brighter year. “
Rain Newton-Smith, chief economist of the CBI, said: “We expect a fairly solid economic recovery to come, although the emergence of Omicron naturally poses another downside risk to our forecast.
“Ultimately, this underscores the need for equitable distribution of vaccines across the world – supporting lives, sustaining livelihoods and freeing our industry for international travel, also boosting trade. Emphasis must be placed on testing and using all the tools at our disposal to keep as many global roads open as possible.
“Increasing exports is also an essential element of sustainable growth. Exporting companies are more productive, resilient and help create internationally competitive UK regions.
“Let’s be frank: UK exports are being overtaken by our global counterparts which, if continued, will have a negative impact on our economy in the long run.
“We must continue to remove barriers to market access globally while helping all companies seek growth internationally.
“The export strategy is a positive step forward with the extension of the new Export Helpdesk and a welcome focus on the UK’s premier service sector. Now we need to track the delivery.
“And we can do more at home too. By matching our peers on R&D spending, we can build on the UK’s existing strengths in areas such as life sciences, higher education and decarbonization to become the science superpower we want. all see.
“But let us not forget the importance of normalizing relations with the EU – our most important and closest trading partner – which will facilitate cooperation in many other areas.”
Key forecast data:
Household employment and expenditure
- Household spending is expected to increase 7.6% in 2022 and 3.1% in 2023 as real incomes recover and employment growth strengthens
- The recovery in the labor market continues, with initial data showing only minimal impact on the number of unemployed after the end of the Job Retention Scheme.
- The CBI expects a relatively small increase in the number of unemployed at the end of this year, after which unemployment falls steadily, bringing the CBI’s forecast (3.8%) to its pre-COVID level.
- However, CPI inflation is expected to accelerate further, peaking at over 5.2% in April 2022, due to a combination of base effects from 2020, price cap increases. Ofgem’s energy, rising fuel prices and pressures on the supply chain. This will affect living standards, with real wages set to decline year over year for much of 2022.
Long term outlook
- Business investment continues to recover over the coming year, briefly exceeding its pre-pandemic level by 2022. However, it then drops from mid-2023 and ends forecasts for CBI 3% below its pre-COVID level at the end of this year.
- At the end of 2023, the CBI expects GDP to still be 3% below its pre-COVID trend.
- Low productivity persists compared to CBI forecasts: despite the recovery over the next few years, output per worker remains 17% below its trend from before 2008 to the end of 2023
- With the recovery in UK exports not showing off in the CBI forecast and import growth starting on a more solid footing, the CBI does not expect net trade GDP support.
- The CBI expects global GDP (in terms of purchasing power parity) to grow at 5.7% in 2021, 4.7% in 2022 and 3.8% in 2023. Most of the savings forecast by the CBI are expected to exceed their pre-pandemic GDP levels by the end of 2022.
- But the global recovery is also likely to be highly asymmetric, with emerging economies lagging behind, due to slower vaccine deployment and limited space for political support.