Booster for business investment needed to sustain the recovery & unleash UK's potential - CBI Economic Forecast

• GDP growth expected to be 6.9% this year, 5.1% in 2022 and 3.0% in 2023
• Unemployment rate to fall back to 3.8% at the end of 2023
• Inflation to peak at 5.2% in April 2022

The foundations for the UK’s economic recovery remain firm despite global supply challenges weighing on growth in the near-term, according to the latest CBI economic forecast.

However, short-term headwinds – including rising costs and shortages - have grown since the business group’s previous forecast in June. Longer-term challenges, notably persistently poor productivity, underline the need for a booster for business investment to support sustainable growth.

The CBI is forecasting 6.9% growth in GDP over 2021 and 5.1% in 2022, revised down from 8.2% and 6.1% respectively. It should be noted that this largely reflects weaker than expected outturn data since our previous forecast. The business group’s forecast expects supply chain frictions to largely dissipate by the middle of next year. Earlier in the Autumn, the Government formed the supply chain advisory group to grip these issues.

Overall, household spending remains the key driver of GDP growth, generating 90% of growth in 2022, and two-thirds in 2023. This is supported by a further improvement in real income, and households running down excess savings accumulated during the pandemic.

The resilience of the UK’s labour market has been a real success story, thanks largely to the Government’s Job Retention Scheme, which helped stave off potentially large-scale job losses. Continued employment growth over the next couple of years also supports household spending.

Business investment appetite has recovered somewhat and, spurred by continual economic growth, it rises briefly above its pre-pandemic level at the end of 2022 (growing by 8.2% over the year as a whole). However, this recovery is short-lived, with capital spending falling from mid-2023, as the super-deduction comes to an end and the rise in corporation tax kicks in. As a result, business investment will continue to lag other advanced economies.

The recovery in exports is also expected to be lacklustre, following disappointing growth over this year so far.

The forecast predicts CPI inflation to peak at 5.2% in April next year. It is set to remain above the Bank of England’s 2% target until Spring 2023, which will hit pay packets and offsets some of the positive underpins to consumer spending.

Tony Danker, CBI Director-General, said:

“The challenge for January 1^st is now very clear for the UK economy. Significant headwinds and rising costs of living threaten the extent of recovery and prospects for economic success. These hurdles for firms will provide a major test for Government – can they foster sustainable UK investment and growth?

“The UK’s New Year resolution must be to give firms the confidence to go for growth. We should be raising our sights on the economy’s potential and seizing the moment.

“I know from speaking with firms of all sizes that they have an ambitious investment mindset, and are anxious to implement growth plans. But while intentions have thawed, we’re coming up to a cliff-edge in 2023. The super-deduction is a welcome catalyst, but a one-hit wonder isn’t enough to make up for four decades of underperforming business investment. We must build on its success with targeted measures encouraging the scale of investment we need, particularly in green technologies. A booster for growth is needed to protect and build on our recovery.

“But this isn’t just a challenge for government. It’s also up to businesses to step up and be part of the solution. Investment in technology and skills are among the most important steps firms can take now that will power productivity growth.

“Government has key levers at its disposal to back business: pro-investment and pro-innovation regulation to help build new markets, a competitive tax regime that incentivises business investment across the board and new market-making interventions, for example on clean energy. Getting this mix right will pay dividends over the longer term, jumpstarting the UK’s flatlining productivity and set us on course for a brighter new year.”

Rain Newton-Smith, CBI Chief Economist, said:

“We expect a pretty firm economic recovery ahead, though understandably the emergence of Omicron poses another downside risk to our forecast. Ultimately this underscores the need for equitable distribution of vaccines across the world – supporting lives, livelihoods and freeing our international travel sector, boosting trade too. The emphasis must be on testing and using all the tools at our disposal to keep as many global routes open as possible.

“Increasing exports is also a vital component of sustainable growth. Exporting companies are more productive, resilient and help create internationally competitive UK regions.

“Let us be candid: UK exports are being outpaced by our global peers which, if allowed to continue, will negatively impact our economy in the long term.

“We must continue to address market access barriers globally while supporting all businesses to seek growth internationally.

“The export strategy is a positive step forward with the extension of the new Export Support Service, and a welcome focus on the UK’s world-beating services sector. We now need to follow through on delivery.

“And there’s more we can do at home, too. By matching our peers on R&D spending we can build on existing UK strengths in areas like life sciences, higher education and decarbonisation to become the science superpower we all want to see.

“But let’s not forget the importance of normalising relations with the EU – our biggest and nearest trading partner – which will aid cooperation in a host of other areas.”

Key forecast data:

Jobs and household spending

• Household spending is set to increase by 7.6% in 2022 and 3.1% in 2023 as real incomes recover, and employment growth strengthens
• Recovery in the labour market continues with early data indicating only a minimal impact on jobless numbers following the end of the Job Retention Scheme.
• We expect a relatively short-lived rise in jobless numbers at the end of this year, after which unemployment falls back steadily, ending our forecast (3.8%) at its pre-COVID level.
• However, CPI inflation is expected to pick up further ahead, peaking at over 5.2% in April 2022 – driven by a combination of base effects from 2020, rises in Ofgem’s energy price cap, higher fuel prices and supply chain pressures. This will hit living standards, with real wages set to fall year-on-year for much of 2022.

Long-term outlook

• Business investment continues to recover over the coming year, rising briefly above its pre-pandemic level by 2022. However, it then falls from mid-2023 and ends our forecast 3% below its pre-COVID level at the end of that year
• At the end of 2023, we expect GDP to still be 3% below its pre-COVID trend.
• Poor productivity persists over our forecast: despite the recovery over the next few years, output per worker remains 17% below its pre-2008 trend at the end of 2023

Global outlook

• With the recovery in UK exports lacklustre in our forecast, and imports growth kicking off on a stronger footing, we do not expect any support to GDP from net trade.

• We expect global GDP growth (in purchasing power parity terms) at 5.7% in 2021, 4.7% in 2022 and 3.8% in 2023. Most of the economies that we forecast are set to surpass their pre-pandemic levels of GDP at the end of 2022.
• But the global recovery is also likely to be very skewed, with emerging economies lagging behind, due to slower vaccine rollouts and limited space for policy support.