With the general election a matter of weeks away, the CBI says the focus is firmly on the UK economy. Its latest economic forecast points to encouraging signs that it is on track to gradually pick up steam over 2024 and 2025.
After the economic struggles in recent years, under the pressures of shocks such as the Covid pandemic and war in Ukraine, GDP growth came in at only 0.1% over 2023, with the dual headwinds of high inflation and increased interest rates weighing on economic activity. This is set to change with growth of 1.0% in 2024 and 1.9% in 2025.
The CBI’s latest UK economic forecast shows that:
• UK GDP growth is projected to rise to 1.0% in 2024.• Momentum should continue in 2025, with GDP growth anticipated to reach 1.9% – broadly in line with the average pre-Covid growth rate (of 2.0% between 2010-19).• Consumer spending is the main driver of growth, reflecting an improvement in households’ real incomes as inflation falls.• Business investment is set to be weak in 2024 but will recover as GDP growth strengthens.• However, productivity remains below its pre-Covid trend, signalling further action is needed to spur longer-term, sustainable growth.
The latest CBI economic forecast shows the UK economy is gradually picking up steam but there is still more to be done to achieve sustainable growth / Picture: Getty/iStock
Louise Hellem, CBI chief economist, said: “It’s encouraging to see that the outlook for the UK economy is improving after a difficult 2023. However, we cannot afford to be complacent about our progress going forward. To ensure longer-term, sustainable growth, we must tackle our ongoing productivity problem. Our Business Manifesto sets out several policies to improve productivity and deliver prosperity through a positive vision for the UK economy. These include a cutting-edge trade and investment strategy, a Net Zero Investment Plan, and more support for firms to invest in AI – particularly where it can help in automation and super-charging productivity.
“Now in the midst of a general election, political parties have an opportunity to prioritise the economy and unlock long-term, sustainable growth by using their manifestos to set out measures that will support business investment and propel growth for the next decade and beyond.”
Highlights of the CBI economic forecast
Consumer spending is set to drive UK growthConsumer spending is projected to be the main driver of the acceleration in GDP growth, rising by 0.8% in 2024 and 2.5% in 2025. The CBI says this mostly reflects improvements in households’ real incomes, due to falling inflation and firm wage growth. It add that households will feel the pinch this year from the cumulative increase in the level of prices over the last three years, in addition to still-relatively higher lending rates.
Business investment sees a recovery in 2025Business investment is set to be weak in 2024, declining by 0.2% over the year. This reflects the lagged impact of stagnant GDP growth over the last year. CBI surveys also suggest a drag from high interest rates. However, a recovery in business investment is on the horizon (1.8% growth in 2025), as activity strengthens.
Inflation expected to settle at the Bank’s 2% target next yearInflation is projected to decline to the Bank of England’s 2% target in the second quarter of 2024 but will pick up slightly in the latter part of this year (due to base effects from price rises this time last year). In 2025, inflation is expected to return to 2% more sustainably, partly reflecting a moderation in domestic price pressures.
Bank Rate projected to fall to a terminal rate of 3.5% in 2025Signs of easing inflationary persistence mean that the CBI expects the Bank of England to cut interest rates over its forecast, with the first reduction likely to occur in August. The CBI then expects the Bank Rate to gradually fall to a terminal rate of 3.5% in the second quarter of 2025.
Fiscal headroom limitedThe CBI’s forecast for stronger GDP growth means that it believes the public finances outlook has improved, but the next government will still face a difficult fiscal inheritance. We expect the debt-to-GDP ratio to peak at 98.3% in the 2024/25 fiscal year, before declining somewhat to 94.8% in 2025/26.
Productivity outlook remains challengingDespite the pick-up in GDP growth, productivity (measured as output per worker) remains around 1.5% below its pre-Covid trend at the end of the CBI’s forecast period. It says this highlights that there is more to be done to boost the UK’s potential for growth over the long-term.
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