Orderly Brexit would see steady growth over next 2 years – CBI Economic Forecast

A smooth Brexit next year would mean that the UK can expect steady economic growth, with an improvement in business investment and continuing export growth over the next two years. That’s according to the CBI’s latest economic forecast.

Underlying growth in the UK economy has largely evolved in line with the CBI’s expectations over the last 6 months. The leading business group is now predicting GDP growth of 1.3% for 2018, 1.4% in 2019 and 1.6% in 2020. The forecast was carried out on the basis of the UK successfully securing an orderly Brexit in 2019, with the Government’s Withdrawal Agreement being ratified.

Key drivers of the growth forecast include:

• A gradual improvement in quarterly household spending growth (1.4% - 2018, 0.8% - 2019, 1.4% - 2020), as real earnings start to show more signs of life
• Business investment growth to pick up modestly from a poor 2018, as Brexit uncertainty lifts and the impact of spending on automation becomes more prominent (-0.5% - 2018, 0.3% - 2019, 1.7% - 2020)
• Slightly more support from government consumption, following announcements of increased spending on the NHS in the last Budget (0.6% - 2018, 1.8% - 2019, 2.0% - 2020)
• Exports to continue growing, supported by firm global growth (1.4% - 2018, 3.0% – 2019, 3.1% - 2020). But a corresponding pick up in import growth (0.4% - 2018, 1.9% - 2019, 2.8% - 2020) means that support from net trade fizzles out over our forecast.

Carolyn Fairbairn, CBI Director-General, said:

“An orderly Brexit next year would see the UK enjoy steady economic growth for the next couple of years. But as the range of recent impact studies show, a no deal scenario would blow these figures out of the water, severely hurting businesses, jobs and living standards.

“The Government’s deal is not perfect. But it is the only offer on the table that can protect our economy, reduce uncertainty and open up a route to a decent trade deal in the future.

“Business has proved resilient in the face of great uncertainty ever since the referendum. Now – with no deal still a real possibility – nearly all firms with contingency plans will be advancing them by Christmas in the absence of some resolution to the Brexit process.

“Brexit has sucked the oxygen from the domestic agenda, where there are urgent issues to address. Crucially, improvements in people’s wages will only be sustainable with higher productivity. So firms will want to see the Industrial Strategy accelerate in 2019 and for the Government to use its’ Spending Review to set out a roadmap for delivering on its R&D spending target in partnership with business.”

Real wage growth is expected to recover, as inflation continues to fall back and a tight labour market pushes earnings growth a little higher. But continually weak productivity will limit the degree of any rise in living standards. As a result, we expect both real wage and household spending growth to remain below their pre-crisis norms.

Business investment growth is expected to remain subdued, as uncertainty around the end-state of the UK’s relationship with the EU puts the brakes on large-scale capital spending. But a modest pick-up is expected over the forecast, as uncertainty lifts - based on the assumption of further progress in negotiations - and the full impact of greater automation spending starts to kick in.

The global economy has seen solid growth, despite momentum slowing later in the year so far. While the CBI expects global growth to remain firm – supporting UK exports – risks to the outlook have risen. These include a further escalation in trade protectionism, the prospect for further volatility in oil prices, and financial markets being hit by further interest rate rises in the US, weighing on emerging markets.

With the Bank of England indicating a path of gradual and limited interest rate rises ahead, the CBI forecasts that they will reach 1.5% by mid-2020 (from their current level of 0.75%), after which we expect the Bank to turn its attention to unwinding some of its post-crisis asset purchases.