7:13 AM 11th December 2023
Firm Up Foundations For Growth Or The 2020s Will Fail To Roar – CBI
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The UK is set for another year of weak growth over 2024 as significant headwinds continue to impact the UK economy, according to the CBI’s latest economic forecast. Following GDP growth of 0.6% in 2023, the CBI expects 0.8% growth in 2024, picking up to 1.6% in 2025.
Growth in consumer spending will remain weak next year (0.4%, unchanged from 2023), as higher interest rates bite harder on household incomes. While we expect the Bank of England to have reached the end of its rate-hiking cycle, the delay in the feed-though to the economy means that households have yet to feel the full impact of higher borrowing costs. The Bank rate is expected to stay at its current level of 5.25% throughout our forecast.
Households will also contend with some loosening in the labour market, with the unemployment rate rising from its current level (4.2%). However, unemployment is set to peak at a still-historically low 5% in mid-2025, which means that the labour market will remain relatively tight.
But set against this, CPI inflation is expected to fall back further, giving a further boost to real earnings. However, inflation is set to stay above the Bank of England’s 2% target over the coming year, ending 2024 at 2.5%, before returning to target in mid-2025.
Sluggish growth is expected to weigh on business investment, which is set to fall by 5% in 2024. Permanent full expensing for capital spending, as announced in November’s Autumn Budget, is expected to boost business investment beyond our forecast horizon, given that it replaces the temporary investment allowance which was set to expire in March 2026.
Alongside falling business investment in 2024, tepid growth in household incomes also leads to falling residential investment – taken together, the fall in total capital spending next year (-4.2%) is a key constraint to economic momentum.
GDP growth recovers in 2025, picking up to 1.6%. This reflects an easing of some of the brakes on activity, with inflation falling back further and the labour market stabilising. Firmer growth also lifts business investment, which grows by 2.7% over the year, setting the stage for a further boost from permanent full expensing beyond this horizon.
But despite the pick-up in GDP growth over 2025, it still remains below the average seen in the aftermath of the 2008/9 financial crisis (around 2%). Similarly, while productivity (output per worker) grows modestly over our forecast, it remains a substantial 21% below a continuation of its pre-crisis trend by the end of 2025.
Amid the sheer degree of headwinds that the economy has faced over the last couple of years, businesses and households have shown remarkable resilience. Let’s not forget that even the weak growth we’ve seen is better than expectations of a recession this time last year.
But that is by no means job done. Businesses are gearing up for another tough year ahead, with our forecast expecting weak growth to persist over 2024. Given that this is coming after an already challenging few years, it’s clear that the 2020s have yet to roar.
With a general election around the corner, it’s imperative that consensus is maintained around growth-enhancing measures in the Autumn Budget. In particular, there must be no back-tracking on making full capital expensing permanent and encouraging announcements around speeding up planning and grid connectivity must be rolled out.
But aside from this, it’s clear that more also needs to be done to unlock the UK’s true growth potential. That includes building a long-term strategy that boosts competitiveness, honours our climate commitments, addresses labour shortages and renews the partnership between business and Government.
Louise Hellem, CBI Chief Economist.
Global economic growth (in purchasing power parity terms) is expected to stay broadly constant at around 3% per year over our forecast. But prospects diverge notably, with growth in the US (1.4%) outpacing that in the Eurozone (0.7%) next year, before converging in 2025 (1.3% and 1.6%).
A benign global backdrop supports UK exports growth. The weakness in domestic demand temporarily depresses imports growth over 2024, leading to a small boost from net trade to GDP growth in the first half of our forecast.
However, the underlying picture on trade remains one of underperformance – UK exports still lag behind other advanced economies, and only reach their pre-COVID level in H2 2025.
Alpesh Paleja, CBI Lead Economist, said:
“The economy has held its own over the last couple of years, but stagnation is nothing to write home about. While we expect growth to pick up eventually, it remains below the norm seen in the years prior to the pandemic.
“Risks to the outlook are also numerous. At home, the spectre of high inflation could linger for longer, and sluggish demand could mean that investment plans remain on hold. While we expect global growth to hold up, prospects in the Eurozone – our biggest trading partner – are notably weak. And global geopolitics remain febrile, which could stoke uncertainty further.
“Ultimately, the foundations of economic growth need to be much firmer to really allow the UK economy to thrive. Full capital expensing is an encouraging first step towards this, but further measures prioritising innovation, skills and productivity will bring us closer to this goal.”