UK economy set to grow and business investment to rise following brush with recession – CBI Economic Forecast

• CBI upgrades its economic forecast, with the UK set to avoid a recession
• Economy expected to grow by 0.4% in 2023, firming to 1.8% in 2024
• Business investment set to rise, reaching pre-crisis levels by end of 2024 (when it grows by 1.9%)
• GDP persistently “scarred” from pandemic, with economy to remain 7% smaller than pre-Covid trend

The economy looks to have fared better than expected in first half of 2023, and is set to steer clear of a recession, according to the CBI’s latest Economic Forecast. The CBI is forecasting 0.4% growth in GDP over 2023, picking up to 1.8% in 2024, upgraded from -0.4% and 1.6% respectively.

Tailwinds to growth have strengthened since our previous forecast in December 2022: the global outlook has improved and wholesale energy prices have fallen. Inflation should ease further through the course of this year, particularly as global price pressures are expected to wane. In particular, food price inflation is set to fall substantially (averaging 15.5% in 2023 and 4.4% in 2024), following a surge in March 2023 (to 19.1%). 

But risks to our inflation forecast remain very much to the upside, with domestic price pressures stubbornly strong, particularly wage growth and services inflation. We expect the Bank of England to raise interest rates twice further, bringing them to 5% in August and to remain alert to the potential for financial market stress.

In light of a more positive outlook for GDP growth, business investment is expected to return to its pre-COVID level by the end of 2024 (rising by 1.9% in 2024). Investment intentions in the CBI’s business surveys have improved over the first half of 2023, partly as firms look to invest in decarbonisation and to meet net zero objectives. Nonetheless, there are continued signs that UK business investment is lagging other developed economies.

Productivity (output per worker) is set to pick up over 2024 (by 1.2%) as GDP growth overtakes employment growth. Yet productivity remains sluggish by historical comparison, staying 2% below its (already weak) pre-COVID trend, and 20% below its pre-financial crisis trend by the end of our forecast.

And whilst the UK will avoid a recession, 2023 will still mark a challenging year for business and consumers. For the first time in four decades, the CBI expects real household incomes to drop for a second consecutive year (-1.3%) – before recovering in 2024 (1.1%). This will inevitably further squeeze household spending.

The CBI’s forecast also suggests that the UK’s GDP is persistently “scarred” from the COVID-19 pandemic. At the end of next year, the economy will be around 7% smaller compared to its pre-Covid trend. 

Rain Newton-Smith, CBI Director General, said:

“Businesses and consumers alike will be relieved that the UK economy has avoided recession and will re-enter growth territory in the second half of this year. But firms want to see growth – and productivity – pick up pace. We want to see the UK at the top of the global league tables once again. 

“So, it’s crucial to create a business environment that gives firms greater confidence to invest and decarbonise. Providing consistency and clarity to the principles underpinning our business tax system will boost the ambitions of UK plc.  

“We need to make sure the UK gets behind green growth. We don’t have a second to lose, as firms clearly have a will to invest in green technologies and decarbonisation. There are major export markets to be won – and we have a huge opportunity to secure significant investment from abroad, strengthening the UK’s economic prospects.”

Alpesh Paleja, CBI Lead Economist, said:

“Tailwinds to both the UK and global economies have firmed since the start of the year. Lower energy prices, China lifting COVID restrictions, and easing supply chain disruption have all contributed to some resilience in activity at home. We expect inflation to fall further over the course of our forecast, which should also ease the squeeze on household budgets.

“While encouraging, there’s no getting away from the fact that this year will be another tough one for both businesses and households. CPI inflation will end 2023 still double the Bank of England’s target, and businesses continue to grapple with persistent cost pressures and a tight labour market.

“It’s also concerning that the UK is underperforming on many of the areas crucial to our long-term prosperity, such as business investment and trade intensity. Making our business environment more attractive to firms at home and abroad must be front of mind in the months ahead.”