12 December 2017
The slight downgrade to the leading business group’s forecast is mainly driven by a slightly weaker contribution from net trade across the forecast period, while household consumption and business investment are expected to remain sluggish through the forecast period. UK productivity is also forecast to remain subdued.
Inflation is expected to remain elevated in the short-term, peaking at 3% in the final quarter of this year, and then moderate slightly as the impact of the post-EU referendum slide in sterling fades. However, inflation is forecast to outpace earnings until 2019, eroding real wages and weighing on consumer spending, a key driver of UK economic growth. As such, our new forecast is that the next increase in UK official interest rates, to 0.75%, will occur in Q4 2019.
The BCC expects UK public sector net borrowing to be £12.4 billion higher over the next three years than predicted by the Office for Budget Responsibility at the 2017 Autumn Budget, with slower growth expectations likely to reduce the Exchequer’s ability to generate tax revenue.
With the UK economy expected to continue on a path of slow and sluggish growth, the business group is urging a far stronger focus on ‘fixing the fundamentals’ of the UK economy over the coming year – as skills and labour shortages, congested infrastructure, patchy digital connectivity, a slow planning system and high up-front costs stymie investment and stunt productivity improvements. At the same time, to lift the cloud of uncertainty over business communities, the UK government must do all it can to move negotiations with the EU forward, secure a transition deal and answer business’s practical questions around trade.
Key points in the forecast:
Dr Adam Marshall, Director General of the British Chambers of Commerce, said:
“Despite pockets of resilience and success, and strong results for some UK firms, the bigger picture is one of slow economic growth amid uncertain trading conditions.
“Clarity on the nature of the UK’s future trading relationship with the EU is needed to ease the cloud of uncertainty that lingers over business communities, and which is undermining many firms’ investment decisions and confidence. Certainty over the course of Brexit would also help to stabilise markets, and reduce the volatility of sterling, which businesses say is increasing their costs.
“Yet even the best possible Brexit deal won’t be worth the paper it’s written on if the government fails to address the many long-standing, and well-known, barriers to growth here at home. Ever-rising upfront costs, a labour market at capacity, growing pressure on land use, and a physical and digital infrastructure in need of investment and expansion, all prevent UK firms from reaching their potential. While the recent Budget made some welcome steps in the right direction, concerted and sustained action to fix the fundamentals is needed to encourage business investment and growth.”
Suren Thiru, Head of Economics at the BCC, said:
“The downgrades to our growth forecast confirm that the UK economy is in a challenging period with growth likely to remain well below average for a prolonged period.
“Continued uncertainty over Brexit and the burden of upfront cost pressures facing businesses is likely to stifle business investment, while falling real wage growth is expected to continue to weigh on consumer spending. Furthermore, with businesses continue to report that the post-EU referendum weakness in sterling is hurting as much as its helping, the significant imbalances currently facing the UK economy is expected to persist through the forecast period.
“The continued weakness in UK’s productivity is a key concern and reflects the lack of progress in dealing with some of the deep-rooted structural problems in our economy, from skills shortages to creaking physical and digital infrastructure.
“Despite the downgrades to our growth projections, the risks to our forecast remain on the downside. Should the UK face a disorderly exit from the European Union, the UK’s growth rates may be materially lower over the medium term.”