- The BCC is upgrading its GDP growth forecast from 2.8% to 3.1% for 2014 – the highest rate of growth since 2007
- We have also upgraded our 2015 forecast from 2.5% to 2.7% and our 2016 forecast remains unchanged at 2.5%. However, this is still a marked slowdown on the growth expected this year
- The first increase in official UK interest rates to 0.75% is expected in Q1 2015 – two quarters earlier than previously forecast
- UK quarterly GDP growth will continue at a strong pace of 0.8% in Q2 2014
The British Chambers of Commerce (BCC) has today (Friday) upgraded its growth forecasts for the next two years – from 2.8% to 3.1% in 2014 and from 2.5% to 2.7% in 2015. For 2016, our forecast is unchanged at 2.5%.
With expected growth of 3.1% this year, it will be the first time since 2007 that annual growth has been above 3%. We continue to believe that GDP will exceed its Q1 2008 pre-recession peak in Q2 2014.
John Longworth, BCC Director General, says that although the upgrading of the forecast is ‘great news’, he warns that Britain still has a lot of work to do to ensure long-term growth prospects. The expected slowdown in growth in the next two years is a warning sign that the UK is overly reliant on consumer spending as a driver of growth. Longworth celebrates strong recent growth in business investment, but warns that it is from a low base – and that businesses need confidence from the government and the Bank of England to sustain investment into the future.
Economic Forecast – Overview
- The BCC is raising its GDP growth forecast from 2.8% to 3.1% in 2014, and from 2.5% to 2.7% in 2015. We expect GDP to exceed its pre-recession peak in Q2 2014.
- Upgrades for 2014 are mainly due to higher than expected GDP growth in the first quarter of this year. Upgrades for both 2014 and 2015 are also linked to the stronger performances we expect from all the main sectors than we predicted in March. Higher predicted growth in employment will also contribute to stronger growth.
- For 2016, our GDP growth forecast remains unchanged, at 2.5%.
- Consumer spending will remain the main growth driver, but its contribution to GDP will fall, particularly after official interest rates start to rise. This is one of the main reasons for the expected slowdown in GDP growth in 2015 and 2016.
- In terms of sectors, the main contributor to UK growth in the next three years will be services. But manufacturing and construction will also record satisfactory positive growth.
- Business investment is expected to record relatively strong positive growth of 8.8% in 2014, 7.4% in 2015 and 7.4% in 2016, albeit from a low base.
- We are predicting that the first increase in UK interest rates will be in Q1 2015 to 0.75% – two quarters earlier than previously forecast. Further modest increases can then be expected, in small 0.25 percentage point steps, with official interest rates reaching 1.25% in Q4 2015 and 2.25% in Q4 2016.
Commenting, John Longworth, Director General of the BCC said:
“Our forecast confirms that Britain is leading, rather than following, other major economies when it comes to short-term growth, which is great news. Businesses up and down the country should be congratulated for their hard work and determination in the face of many challenges over recent years. But make no mistake – we still have a lot of work to do.
“The task at hand is to ensure that 2014 is not ‘as good as it gets’ for the UK economy. Everything possible must be done to avoid slower growth in future. We need to invest, innovate, export and build. While we forecast business investment to grow strongly over the next three years, that investment is rising from an extremely low base. To sustain investment momentum into the future, the government and the Bank of England need to give businesses the confidence they need to invest. We urge the Bank of England to keep official interest low for as long as possible, and ensure that future rate rises are gradual and modest.
“We have made far too much progress in recent years to simply accept that growth rates are permanently lower than they were before the financial crisis. To guard against that possibility, we need a real, long-term partnership between government and business – with ministers unblocking infrastructure, training and access to finance so businesses can commit to invest, create jobs and export. With the fantastic businesses we have in the UK, there’s no reason that a 3% growth rate should be the sum of our ambitions.”
David Kern, Chief Economist at the BCC, said:
“Though our GDP forecasts have been upgraded, we are predicting a marked slowdown in the pace of growth, from 3.1% in 2014 to 2.5% in 2016. This will mainly reflect a deceleration in household consumption growth, and falling public spending as a share of GDP. Together, these factors will more than offset increased contributions to GDP from investment and net trade.
“As official interest rates start rising, probably in early 2015, indebted households with mortgages will come under increased financial pressure, and the weakening in household consumption will be a key factor in lowering GDP growth.
“The MPC’s efforts to provide clarity on the future path of interest rates are being hampered by repeated calls for early rate rises whenever positive news is published, and by apparent inconsistencies between Governor Carney’s reassuring comments and the MPC’s minutes. The strong rise in sterling over the past year, which makes our exports more expensive, is an important reason for not raising rates prematurely. The MPC must reassure businesses that when rates start rising, increases will be gradual, so that unwelcome surprises are avoided.”
Other elements from within the forecast
Main components of demand
- Growth in household consumption will strengthen to 2.7% in 2014, and will then slow to 2.6% in 2015 and 2.2% in 2016. Our new forecast is higher than its predecessor for 2014 and 2015, but lower for 2016.
- Our new forecast envisages stronger growth than we predicted in March in business investment over the next few years, but from a low base. We expect business investment to record relatively strong positive growth of 8.8% in 2014, 7.4% in 2015 and 7.4% in 2016. Even so, business investment will only surpass its pre-crisis Q1 2008 peak in Q4 2016.
- Our forecast is that the real net trade deficit will fall from 1.3% of GDP in 2013 to 0.7% in 2016, while the net deficit in current prices will fall from 1.6% of GDP in 2013 to 1.1% in 2016. As in recent years, the further progress will be mainly due to a higher services surplus.
Main sectors of the economy
- The services sector, the long-standing driver of the economic recovery, is forecast to record calendar year growth of 3.1% in 2014, 2.9% in 2015, and 2.7% in 2016. The share of services in total output is likely to rise a little further in the next few years.
- Our new forecast for total industrial output predicts positive calendar year growth of 2.9% in 2014, 1.7% in 2015 and 1.4% in 2016.
- Manufacturing output: Our forecast envisages positive manufacturing growth of 3.4% in 2014, 1.7% in 2015 and 1.6% in 2016.
- Construction output: In full-year terms, we predict construction output growth of 3.3% in 2014, 3.1% in 2015 and 3.0% in 2016.
Official interest rates
- Our new central forecast is that the first increase in UK official interest rates, to 0.75%, will occur in Q1 2015. This is two quarters earlier than envisaged in our Q1 forecast.
- Further modest increases in official rates can then be expected, in small 0.25 percentage point steps, with official rates reaching 1.25% in Q4 2015 and 2.25% in Q4 2016.
Unemployment and productivity
- We expect the unemployment rate will fall from 6.8% in Q1 2014 to 6.3% in Q1 2015, 5.8% in Q1 2016 and 5.4% in Q1 2017. We expect UK unemployment to fall faster, and to a lower level, than we predicted in March.
- We are forecasting UK unemployment to fall from 2.209 million in Q1 2014, to 2.079 million in Q1 2015, to 1.949 million in Q1 2016, and to 1.819 million in Q1 2017, a net overall fall of 390,000 over the next 3 years.
- We are forecasting that total youth unemployment (people aged 16 to 24) will fall from 868,000 in Q1 2014, to 775,000 (a jobless rate of 16.9%) in Q1 2017, a net fall of 93,000.
- Productivity: We are forecasting that over the next three years both output per person and output per hour will increase in total by 2.4%. In spite of this improvement, productivity (both per person and per hour) in Q1 2017 would still be slightly below its Q1 2008 level.
- UK public finances: The OBR forecast, outlined at the time of the March 2014 Budget, is realistic in predicting steady falls in UK public sector net borrowing. But the OBR’s timetable is slightly too ambitious in our view
- While the OBR is forecasting that net borrowing would move into a small surplus in 2018/19, our view is that achieving this aim is likely to take 1-2 years longer.
- In annual average terms, we are forecasting annual CPI inflation at 1.9% in 2014, 2.0% in 2015 and
- 1% in 2016. In Q1 we predicted 2.0% in 2014, 2.0% in 2015, and 2.0% in 2016