2014 growth to reach seven year high with slowdown to follow
• BCC upgrades 2014 GDP growth forecast from 3.1% to 3.2% – the highest growth rate since 2007
• Growth forecast for 2015 upgraded from 2.7% to 2.8%, but remains unchanged for 2016 at 2.5%
• First increase in official interest rates to 0.75% expected in Q1 2015
• GDP growth will continue at a strong pace of 0.8% in Q3 2014
• Exports of goods and services downgraded: from 1.9% to 0.8% for 2014, from 4.2% to 4.1% for 2015
• John Longworth: “We must ensure the stellar growth in 2014 is not a flash in the pan”
The British Chambers of Commerce (BCC) has today upgraded its GDP growth forecasts for this year and next year – from 3.1% to 3.2% in 2014 and from 2.7% to 2.8% in 2015. With expected growth of 3.2%, 2014 will be the first year since 2007 that growth will have exceeded 3%. This is largely due to stronger employment figures and higher expected growth for Q3 and Q4 2014 than previously forecast in May.
The business group, which represents thousands of companies across the UK, is forecasting a moderate slowdown in growth from 2015, with its prediction for 2016 remaining unchanged at 2.5%. This reflects a deceleration in household consumption and falling public spending as a share of GDP. BCC Director General John Longworth says we must do everything possible to ensure the strong growth in 2014 is not a ‘flash in the pan’. He calls the expected slowdown in 2015 and 2016 a ‘warning sign’ for the UK, which is currently too reliant on consumer spending as a growth driver.
ECONOMIC FORECAST – OVERVIEW
• The BCC is raising its UK GDP growth forecast from 3.1% to 3.2% in 2014, and from 2.7% to 2.8% in 2015.
• Upgrades for 2014 and 2015 are mainly due to: a stronger labour market; higher than expected growth in Q3 and Q4 2014; and upgraded ONS estimates for year-on-year GDP growth in Q2 2014.
• For 2016, the BCC’s GDP growth forecast remains unchanged at 2.5%.
• The first increase in official interest rates is expected in Q1 2015 to reach 0.75% – unchanged since our last forecast in May.
• The BCC expects modest increases of 0.25 percentage points, with interest rates reaching 1.25% in Q4 2015 and 2.25% in Q4 2016.
• After official rates start rising in 2015, household consumption will slow markedly. But consumption will still contribute to GDP growth more than other areas of the economy.
• The UK unemployment rate is forecast to fall from 6.4% in Q2 2014, to 5.5% in Q2 2015, 5.0% in Q2 2016 and 4.9% in Q2 2017.
• The new forecast for exports of goods and services has been downgraded for the next two years: from 1.9% to 0.8% for 2014, from 4.2% to 4.1% for 2015, and remains unchanged at 4.6% for 2016.
• The downgrade in exports is due to the lower than expected figures for Q2 2014. The ONS also revised down its historical figure for exports in 2013, from 1.9% to 0.5%.
Commenting, John Longworth, Director General of the BCC said:
“Our forecast confirms that Britain has become one of the fastest-growing developed economies. We are leading, rather than following, other major economies when it comes to short-term growth. Businesses up and down the country should be congratulated for their hard work and determination in driving the UK recovery despite a number of international and domestic challenges.
“The task at hand is to ensure that the stellar 2014 growth is not a flash in the pan. We need to invest and export more, innovate, and build. It is disappointing that we have downgraded export growth for the next two years as a strong international trade performance is key if we are to steer away from a reliance on consumer spending. While business investment is forecast to grow strongly over the next three years, it will be growing from a 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 by keeping official interest rates low for as long as possible. Any future rate rises must be gradual and modest.
“The UK must aim higher than accepting growth rates that simply go back to where they were before the recession, or worse – fall even lower. If we are to maintain a world-leading growth performance, we need a long-term partnership between government and business – with ministers unblocking infrastructure projects and improving access to finance so firms across the UK can invest, create jobs and export. We have a wealth of impressive and enterprising businesses in the UK, and there is no reason why a 3% growth rate should be the height of our ambitions.”
David Kern, Chief Economist at the BCC, said:
“Though our GDP forecasts have been upgraded for the next two years, we are predicting a slight slowdown in the pace of growth from next year. This reflects a deceleration in household consumption, and falling public spending as a share of GDP. Together, these factors will more than offset the increased contributions to GDP growth from investment and trade.
“We predict strong growth of 0.8% per quarter in the second half of this year. But as interest rates start to rise in 2015, indebted households with mortgages will face increased financial pressures, and much weaker household consumption will act as a drag on growth. To maintain our world leading performance, we may have to look to other sources of growth. Greater efforts to boost exports and investment, and avoiding premature interest rate increases, will ensure that the recovery is sustainable and that the pace of growth can strengthen in the future.
“The UK recovery remains on course and we are now outperforming other major economies. But many potential obstacles remain up ahead. Geo-political uncertainties such as Ukraine and the Middle East and sluggishness in the eurozone will remain serious challenges for some time. It is therefore doubly important to address the risks that we can tackle, such as the UK’s huge current account deficit. To continue driving the recovery, businesses need a stable and supportive environment that encourages enterprise, with low interest rates.”
OTHER ELEMENTS FROM WITHIN THE FORECAST
Main components of demand
• We expect growth in household consumption to strengthen to 2.9% in 2014, and then slow to 2.8% in 2015 and 2.2% in 2016. Our new forecast is higher than in Q2 for 2014 and 2015, and unchanged for 2016.
• Our new business investment forecast predicts stronger 2014 growth than we expected in Q2, but unchanged growth in 2015 and 2016. We expect business investment to record relatively strong positive growth of 10.7 % in 2014, 7.4% in 2015 and 7.4% in 2016. Even so, business investment will only surpass its Q1 2008 pre-crisis peak in Q3 2016.
• Our forecast is that the real net trade deficit will fall from 1.4% of GDP in 2013 to 0.8% in 2016, while the net deficit in current prices will fall from 1.8% of GDP in 2013 to 1.2% in 2016. As in recent years, the progress of net trade will be mainly due to a higher trade surplus in services.
Main sectors of the economy
• The services sector, the UK economy’s long-standing main growth driver, is forecast to record calendar year growth of 3.3% in 2014, 3.1% in 2015, and 2.7% in 2016. The share of services in total UK 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 2.0% in 2014, 1.4% in 2015 and 1.4% in 2016.
• Manufacturing output: Our new forecast envisages positive manufacturing growth of 3.0% in 2014, 1.5% in 2015 and 1.6% in 2016.
• Construction output: In full-year terms, we predict construction output growth of 4.3% in 2014, 2.8% 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 timetable is unchanged since our Q2 forecast.
• Further modest increases in official rates can then be expected, in small steps of 0.25 percentage points, with official rates reaching 1.25% in Q4 2015 and 2.25% in Q4 2016.
Unemployment and productivity
• Our new forecast envisages that the UK unemployment rate will fall from 6.4% in Q2 2014 to 5.5% in Q2 2015, 5.0% in Q2 2016 and to 4.9% in Q2 2017. We expect UK unemployment to fall faster, and to a lower level, than we predicted in Q2.
• We are forecasting total UK unemployment to fall from 2.077 million in Q2 2014, to 1.817 million in Q2 2015, to 1.677 million in Q2 2016, and to 1.657 million in Q2 2017 – a net overall fall in total unemployment of 420,000 over the next three years
• We are forecasting that total youth unemployment (people aged 16 to 24) will fall from 767,000 in Q2 2014 (a jobless rate of 16.9%), to 636,000 (a jobless rate of 13.8%) in Q1 2017, a net fall of 130,000
• Productivity: Our forecast envisages modest increases in productivity from current low levels. However, productivity is unlikely to reach its pre-recession level in the next three years.
• UK public finances: The OBR forecast, outlined at the time of the March 2014 Budget, is realistic in predicting steady falls in borrowing. But the OBR’s timetable is slightly too ambitious in our view.
• While the OBR is forecasting that UK public sector net borrowing would move into a small surplus in 2018/19, our view is that achieving this aim this would take one to two years longer.
• In annual average terms, we are forecasting annual CPI inflation at 1.8% in 2014, 1.9% in 2015 and 2.0% in 2016. In Q2 we predicted 1.9% in 2014, 2.0% in 2015, and 2.1% in 2016.