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CBI ECONOMIC FORECAST
MAY 2016 (EMBARGOED UNTIL MONDAY 16TH MAY)
GDP
The UK economy saw a softer start to 2016, with GDP growth
coming in at 0.4% in Q1—down from 0.6% in Q4 2015, and
lower than we expected in our previous forecast in February
(0.6%). Business surveys point to momentum remaining
sluggish going into Q2.
Some of the slowing can likely be attributed to uncertainty
ahead of the EU referendum in June causing business
decisions and activity to be put on hold. The impact of this
uncertainty can also be seen elsewhere: the pound has fallen
by 9% since late 2015; business sentiment has waned;
uncertainty over public policy has spiked; and investment
intentions have deteriorated across several surveys.
We continue to expect growth to be driven by the dual
engines of household spending and business investment over
the next few years. However, we have downgraded our
forecast for GDP growth for both 2016 and 2017. In 2016,
(2.0%, from 2.3% in February), the downgrade mostly reflects
the softer start to this year, signs that uncertainty is bearing
down on plans for investment, and some revisions to historical
data. In 2017, slower growth in real incomes weighs on
household spending while export growth is depressed by
sluggish global growth and competitiveness.
The most imminent risk to the outlook is that uncertainty
ahead of the EU referendum could have a more pronounced
impact on activity than we have seen to date. Globally, the UK
remains exposed to underwhelming economic momentum in
both advanced and emerging economies. And although global
financial markets have calmed since January, there remains
the risk of more volatility ahead, particularly given the
increasing fragility of financial conditions in China.
Investment
Overall, surveys of investment intentions have shown a
deterioration in investment plans, particularly in the services
sector. Some of this is likely to be related to uncertainty ahead
of the EU referendum. Although our April investment
intentions data for the manufacturing industry actually
strengthened, anecdote from the sector suggests some
specific factors at play – in particular, replacement spending
in the food & drink sector (following flood-related damage
earlier in the year) and buildings investment by chemicals
manufacturers looking to expand production on the back of
solid export demand.
Taking into account the range of investment intentions data,
we expect some softening in business investment growth in
Q2, which drives some of the downgrade to our forecast in
2016. We expect a recovery in investment thereafter, before
growth settles at rates closer to the pre-crisis average in
2017. Even with the softening in Q2, business investment still
accounts for a major portion of GDP growth in our forecast:
around a quarter in 2016, and a third in 2017.
Households
Household spending grew strongly over 2015 (by 2.8% - the
fastest since 2007), with purchasing power boosted by very
low inflation. Consumer activity has generally remained strong
since, although some indicators have shown signs of tailing
off. Notably, slower nominal wage growth has taken some of
the edge off real incomes growth, and consumer confidence
has ticked lower amid growing concern over economic
conditions in the year ahead.
Nonetheless, a slight slowing in growth is occurring from a
high base and the underpins to consumer spending remain
solid. Continually low inflation and a recovery in wage growth
will continue to support households in 2016, driving further
robust growth in spending this year. We expect household
spending growth to ease in 2017, as higher inflation eats into
real incomes. However, it is still expected to be a mainstay of
economic growth, driving almost half of the expansion in GDP
next year.
Trade
There are tentative signs that the fall in the pound since
November is feeding through to exports. Our April Industrial
Trends Survey shows that manufacturers’ export order books
have improved moderately, and competitive pressures have
alleviated.
However, we still do not expect any support from net trade to
GDP growth ahead. Slower world trade and sluggish global
momentum weigh on exports in our forecast, offsetting any
boost from a lower pound. Meanwhile, the relative strength in
domestic demand will shore up import growth, thus ensuring
that net trade remains a drag on GDP growth. Even though
we expect less of a negative contribution in 2016 (-0.2ppts)
relative to our February forecast (-0.5ppts), this is down to a
larger downgrade to import growth than exports, rather than a
material pick up in export growth.
Monetary policy and inflation
Our outlook for inflation is broadly unchanged: we still expect
the CPI rate to move gradually back to the Bank of England’s
2% target in 2017, as the past decline in fuel prices falls out of
the year-on-year comparison.
But with both global and domestic inflationary pressures still
muted, there seems to be little impetus for a rate rise. As a
result, we have pushed out our timing of the first rate rise to
Q2 2017, two quarters later than our previous forecast.
CBI ECONOMIC FORECAST
MAY 2016
CBI UK economic forecast
2016
12mth% unless otherw ise stated
2017
2015
2016
2017
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Real GDP
2.3
2.0
2.0
2.1
1.9
2.0
2.1
2.2
2.2
2.0
1.8
Manufacturing output
-0.3
-0.2
1.0
-1.2
-0.5
0.3
0.7
1.3
1.2
0.9
0.7
Household consumption
2.7
2.5
1.5
2.7
2.5
2.6
2.3
1.9
1.6
1.3
1.1
Government consumption
1.5
0.0
0.6
1.2
0.2
-0.7
-0.7
0.1
0.6
1.0
0.9
Household savings ratio
4.2
4.0
3.1
4.5
4.2
4.2
3.1
3.7
3.6
3.5
2.5
4.1
4.0
5.2
3.4
1.8
3.3
7.3
5.4
6.5
5.3
3.7
Growth & Consumption
Investment
Fixed investment
of which:
Total business
5.2
5.3
6.8
4.7
2.8
3.7
10.0
6.5
9.0
7.5
4.2
General government
0.5
-2.0
1.7
-5.5
-3.0
-1.8
2.6
1.7
2.5
1.7
0.8
Manufacturing
4.3
-3.3
6.2
-8.0
-5.8
-3.4
4.7
5.8
6.6
8.0
4.2
Exports
5.1
1.7
3.6
2.5
0.4
1.5
2.2
2.9
3.3
3.9
4.4
Imports
6.3
2.2
3.2
0.8
4.2
2.0
2.1
3.3
3.3
3.3
3.0
Current account (£bn)
-96.2
-85.9
-69.0
-22.5
-22.1
-21.2
-20.1
-18.9
-17.7
-16.8
-15.6
% of GDP
-5.2
-4.5
-3.5
-4.8
-4.6
-4.4
-4.1
-3.9
-3.6
-3.4
-3.2
CPI
0.0
0.9
1.9
0.3
0.7
1.0
1.5
1.9
1.9
1.9
2.0
RPI
1.0
1.9
2.8
1.4
1.8
2.0
2.4
2.8
2.7
2.9
2.9
RPIX
1.0
1.9
2.6
1.5
1.9
2.0
2.3
2.8
2.6
2.6
2.6
Producer output prices
-1.7
0.4
2.7
-1.0
-0.3
0.8
2.1
2.5
2.6
2.7
2.7
Unemployment (ILO, mn)
1.78
1.71
1.76
1.68
1.69
1.71
1.74
1.74
1.76
1.75
1.78
Unemployment rate (%)
5.4
5.0
5.1
5.1
4.9
5.0
5.1
5.1
5.1
5.1
5.2
Unemployment (CC, mn)
0.79
0.74
0.77
0.73
0.71
0.73
0.76
0.75
0.78
0.77
0.79
External Trade
Prices
Labour Market
Claimant count rate (%)
2.3
2.1
2.3
2.1
2.1
2.2
2.2
2.2
2.3
2.3
2.4
Employment (ILO, mn):
31.19
31.51
31.26
31.46
31.51
31.53
31.54
31.48
31.39
31.22
30.95
2.6
3.0
2.7
1.7
3.4
3.5
3.2
3.0
2.8
2.7
2.4
Net borrowing (£bn)
74.0
63.3
54.8
% of GDP
3.9
3.3
2.7
Debt/GDP (%)
83.5
83.4
82.8
2015
2016
2017
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
3.0
3.1
3.5
3.5
3.1
3.0
2.7
3.1
3.6
3.6
3.7
Average earnings*
* Including bonuses
Public Sector**
*2015/16; 2016/17; 2017/18 excludes APF
Forecast Assumptions
Global GDP
2016
2017
UK Bank Rate
0.50
0.50
0.69
0.50
0.50
0.50
0.50
0.50
0.75
0.75
0.75
Oil prices $ per barrel
52.4
40.7
45.9
33.7
41.8
43.3
44.2
45.0
45.7
46.2
46.6
GBP Trade-weighted index
91.4
85.5
89.6
87.0
83.4
85.2
86.1
87.6
89.2
90.4
91.1
USD/GBP
1.53
1.39
1.43
1.43
1.38
1.38
1.36
1.39
1.42
1.45
1.47
EUR/GBP
1.38
1.28
1.35
1.30
1.25
1.28
1.30
1.32
1.34
1.36
1.37