The British Chambers of Commerce (BCC) has downgraded its UK GDP growth forecast for 2014 from 3.2% to 3.0% in 2014, but this figure still represents the fastest growth experienced by the British economy since 2007. The BCC has also revised down its growth forecasts for the following two years from 2.8% to 2.6% in 2015 and from 2.5% to 2.4% in 2016. This is largely due to slower than expected growth in services, household consumption and exports and weaker than expected GDP growth in Q3 2014
BCC Director General, John Longworth, says that while we welcome the strong 2014 growth indicated by the forecast, he believes the downgraded forecast is an ominous warning sign and urges the government to waste no time in addressing key areas that are holding back good firms, such as access to capital to grow their business.
ECONOMIC FORECAST – OVERVIEW
- The BCC is lowering its UK GDP growth forecast from 3.2% to 3.0% in 2014, from 2.8% to 2.6% in 2015, and from 2.5% to 2.4% in 2016.
- The downgrades are mainly due to lower than expected growth in services, household consumption and exports.
- A slightly lower starting point of the new forecast, due to weaker actual GDP growth in Q3 2014 than previously predicted, also contributed to the downward revision.
- Quarterly GDP growth is expected to remain at 0.7% in Q4 2014, followed by a slowdown to 0.6% per quarter from Q1 2015 onwards
- Though household consumption and services output are forecast to grow more slowly than predicted in Q3, they will be the main contributors to GDP growth in the next few years.
- Strong business investment is predicted with growth of 7.5% in 2014, 7.5% in 2015 and 7.4% in 2016.
- UK interest rates are expected to rise to 0.75% in Q3 2015, two quarters later than in the Q3 forecast.
Commenting, John Longworth, Director General of the BCC said:
“Although this updated forecast slightly lowers our growth predictions, it also confirms that Britain will be one of the fastest-growing developed economies as we close out 2014. This is a great achievement, and businesses up and down the country should be congratulated for their hard work and resolve to drive the recovery in the face challenges and uncertainty both at home and abroad.
“However, there is no reason why a 3% growth rate should be the height of our ambitions. Downgrades to our growth forecast are a warning sign that we still face a number of hurdles to securing a balanced and sustainable recovery. A number of headwinds from the global economy are also having a real impact on British businesses. The eurozone is weak, with a real risk of deflation, growth in emerging markets has slowed and political uncertainty in Ukraine, the Middle East and elsewhere is affecting business and consumer confidence. Uncertainty in the economy generally affects consumer confidence as does the spending and debt cycle.
“Our dependence on consumer spending and mortgages means that the UK economy is particularly sensitive to interest rates. Any short-term rate rises could present a huge risk to our economy. With UK exports broadly flat, it is crucial to reassess the UK’s overall export growth strategy and the support available to existing and potential exporters.
“Nonetheless itis encouraging to see that British businesses aren’t backing down from their expansion and investment plans, despite the uncertain economic backdrop. We must continue to support these businesses as they invest, grow, innovate and export. A sustainable, well-balanced economy can only be achieved if there is commitment from all political parties to long-term strategic planning, rather than the political short-termism that has plagued British growth prospects for too long.”
David Kern, Chief Economist at the BCC, said:
“Our GDP forecasts are slightly lower than in Q3, but overall the prospects are still positive. Although we expect a slowdown in the pace of expansion, UK growth in the foreseeable future will be stronger than in the eurozone, including in Germany and France. British business investment has recovered in recent years and we expect steady increases in the share of investment in GDP. But there are still some areas of concern - UK trade deficit continues to grow and the current account deficit is dangerously large.
“In the short term, the main concern for the UK is a continuation of the slowdown in recent months. A deceleration in growth may be unavoidable, given the weaker trends in the global economy, particularly in the eurozone. However, it is important to counter the impact of these downward pressures by maintaining low interest rates and pro-business policies, in order to minimise the risk of the recovery stalling. In the longer term the key structural risks facing the UK are persistent low productivity and the twin fiscal and trade deficits. Unless these issues are addressed resolutely, they could undermine Britain’s future credibility.
“Despite stronger than expected economic growth, the UK’s ability to generate tax revenues has deteriorated - due to weak earnings, the decline in oil and gas output, as well as big profit reductions from financial institutions. The UK must now persevere with the difficult job of cutting the deficit, while focusing on policies that support higher productivity.”
OTHER ELEMENTS FROM WITHIN THE FORECAST
Main components of demand
- Growth in household consumption is forecast to strengthen initially to 2.2% in 2014, and to 2.4% in 2015; it will then slow markedly to 1.9% in 2016.These new forecasts are lower than in Q3.
- The new forecast predicts continued strong positivegrowth in UK business investment - 7.5% in 2014, 7.5% in 2015 and 7.4% in 2016.
- The real net trade deficit will fall from 2.2% of GDP in 2013 to 1.8% in 2016, while the net deficit in current prices will fall from 1.9% of GDP in 2013 to 1.2% in 2016. As in recent years, future improvements in total net trade will be largely due to a higher trade surplus in services.
Main sectors of the economy
- The services sector is forecast to record growth of 3.2% in 2014, 2.9% in 2015, and 2.7% in 2016, slightly lower than predicted in the Q3 forecast. The share of services in total UK output is likely to rise further in the coming years.
- Total industrial outputis predicted to record growth of 2.3% in 2014, 1.5% in 2015 and 1.6% in 2016.
- Manufacturing output:The new forecast predicts positive manufacturing growth of 3.5% in 2014, 1.8% in 2015 and 1.8% in 2016.
- Construction output: In full-year terms, we predict construction output growth of 4.9% in 2014, 1.9% in 2015 and 1.6% in 2016.
Official interest rates
- The first increase in UK official interest rates, to 0.75%, is forecast to occur in Q3 2015, two quarters later than we previously predicted.
- Further modest increases in official rates can then be expected, in small 0.25 percentage point steps, with official interestrates reaching 1.00% in Q4 2015 and 1.75% in Q4 2016.
Unemployment and productivity
- The new forecast predicts that the UK unemployment rate will fall from 6.0% in Q3 2014 to 5.6% in Q3 2015, 5.2% in Q3 2016 and to 5.0% in Q3 2017.These jobless rates are slightly higher than those we predicted in our Q3 forecast.
- UK jobless totalis expected to fall from 1.959 million in Q3 2014, to 1.839 million in Q3 2015, 1.749 million in Q3 2016, and to 1.669 million in Q3 2017, a net overall fall in total unemployment of 290,000 over the next 3 years.
- Total youth unemployment (people aged 16 to 24) is predicted to fall from 737,000 (a jobless rate of 16.2%) in Q3 2014, to 533,000 (a jobless rate of 11.9%) in Q3 2017, a net fall of 204,000.
- UK productivityis now considerably lower than before the financial crisis. The forecast envisages that productivity will remain weak in the next few years, increasing at a pace that is slower than before the financial crisis.
- UK public finances: The OBR forecast, outlined in the December 2014 Autumn Statement, acknowledges that cutting the fiscal deficit will be more difficult and take longer than previously estimated.
- While the OBR is forecasting that UK public sector net borrowing would move into a small surplus in 2018/19, the forecast shows that achieving this aim would take 1-2 years longer.