Air of uncertainty hinders growth of UK economy

Posted on 16 May 2016 by Jonny Williamson

The UK economy is expected to continue to grow – but at a slower rate – through 2016 and 2017, and there are signs that global economic risks are starting to weigh on investment plans, according to the latest CBI economic forecast.

The leading business group’s latest quarterly forecast predicts that the UK will see 2.0% GDP growth in 2016 and 2017, both of which are downgrades from the CBI’s last forecast in February (2016 – 2.3%; 2017 – 2.1%).

Crop - Carolyn Fairbairn, Director General, CBI
Carolyn Fairbairn, director general, CBI.

Growth is again expected to be driven by household spending and investment, but the deterioration in the global economic outlook, including weaker prospects for China and other emerging markets, continue to represent major challenges.

The economy saw a softer than expected start to the year, which has contributed to a large part of the downgrade in GDP growth in 2016. There are also signs that uncertainty over the outcome of the EU referendum is having a tangible impact on the spending plans of some firms.

[The CBI’s central economic forecast was carried out on the basis of our current membership of the European Union.]

CBI Director-General, Carolyn Fairbairn commented: “A dark cloud of uncertainty is looming over global growth, particularly around weakening emerging markets and the outcome of the EU referendum, which is chilling some firms’ plans to invest.

“At present, the economic signals are mixed – we are in an unusually uncertain period.”

Rain Newton-Smith, director of Economics, CBI
Rain Newton-Smith, director of Economics, CBI.

CBI Economics Director, Rain Newton-Smith added: “With GDP growth softening and commodity prices still low, inflationary pressures remain muted.

“Referendum uncertainty also appears to be dampening some activity in the near-term, and so put altogether, we do not now expect to see a rise in interest rates before 2017.

“On the global front, momentum is tepid and the picture for some emerging markets remains weak. Growth among the Asian giants is likely to continue to outperform more advanced economies, but financial fragilities in China are still raising concerns.”

Once again, net trade is not expected to provide much support to growth. While the CBI expects a smaller drag in 2016 (-0.2%) relative to February (-0.5%), this mostly reflects a larger downgrade to import growth rather than much of a recovery in exports.