Imperative to protect UK growth beyond Brexit - CBI Economic Forecast

According to the CBI’s latest economic forecast, GDP growth for over the next two years is set to remain modest at 1.3% in 2019 and 1.2% in 2020. For 2021, the CBI forecasts a somewhat brighter outlook, with growth picking up to 1.8%.

This is based on the assumption that the UK exits the EU by 31 January 2020 and has clear line of sight to an ambitious trade deal, involving alignment with EU rules where essential for frictionless trade along with protection for UK’s world-beating services sector within the existing transition period. (see Notes to Editors for full list of Brexit assumptions).

The main risk to the outlook remains continued Brexit uncertainty, particularly the threat of a No Deal Brexit. On the global front, a further escalation in US-China trade tensions would deliver further hits to world growth and trade, with knock-on impact on the UK economy.

Rain Newton-Smith, CBI Chief Economist, said:

“Business continues to show remarkable resilience after more than three years of crippling uncertainty. In that time, firms have continued to go about their day jobs, playing a vital part in driving economic growth. But they’ve been beset by headwinds. Alongside perennial Brexit uncertainty, they are also contending with softer global demand.

“Should these dual headwinds subside, we expect a gradual pick-up in activity. But the bigger picture is one of fairly modest growth over the next couple of years – growth that should be far better, given the UK’s relative strengths.

“The UK’s potential has been held back by more than a decade of weak productivity growth and stop-start investment. It’s vital that the next government prioritises lifting productivity and living standards by addressing day-to-day business concerns, including reforming the apprenticeship levy, raising UK R&D expenditure and tackling long-term challenges on skills.

“But transforming a lost decade of productivity will only be possible if supported by a good Brexit deal – one that keeps the UK aligned with EU rules where essential for frictionless trade along with protecting the UK’s world-beating services sector, which accounts for 80% of our economy.

“Let’s be clear: a no deal Brexit would put the brakes on UK growth and realise businesses’ worst fears. What’s needed is a clear and committed line of sight to an ambitious deal that will protect the UK’s economy and future prosperity.

“If firms can see a close deal with the EU on the horizon, with no further Brexit cliff-edges to worry about, investment will be unlocked.”

Growth is expected to remain largely driven by household spending (which rises by 1.2% in 2019, 1.1% in 2020 and 1.4% in 2021), thanks to further, albeit slower, rises in real earnings.

Growth also sees an increased contribution from government consumption (3.3% in 2019, 2.1% in 2020 and 2.5% in 2021), following commitments made in the September Spending Review.

Business investment is expected to grow modestly over 2020 (0.3%), as Brexit uncertainty gradually wanes under our assumption that the UK begins a smooth transition to a new relationship with the EU. It picks up somewhat in 2021 (2.2%), as clarity over the future UK-EU relationship is more forthcoming. In the case of more prolonged Brexit uncertainty, we would expect business investment to be weaker (see Notes to Editors for GDP growth under different Brexit scenarios).

Our forecast sees a downgrade to global growth, which has continued to disappoint during the first half of 2019, reflecting regulatory tightening in China, slower Eurozone growth and economic stress in some emerging markets. Increasing trade tensions are also weighing on investment and sentiment. We still expect an improvement in global growth ahead, particularly as momentum in the Eurozone picks up and the emerging markets outlook stabilises.

But growth over the forecast remains domestically driven. While global economic growth is expected to improve, driving UK export growth higher (0.4% in 2019, 1.8% in 2020 and 1.9% in 2021), this is offset by a pick-up in imports growth due to improving domestic demand. As a result, support to growth from net trade will be negligible.

Recent data shows early signs of a softening in the labour market. The forecast expects the recent trend to continue, with employment declining gently for the rest of this year. Growth in employment improves modestly ahead but remains below the rates seen in the recent past.