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BCC downgrades 2015 growth forecast but predicts earnings are set to rise

The British Chambers of Commerce has downgraded its UK GDP growth forecast for 2015 from 2.7% to 2.3%, following weaker than expected growth at the start of the year. However, the BCC believes the slowdown is temporary and the prospects over the medium term remain steady, with GDP growth predicted to be 2.6% in 2016 and 2017.

Commentating on the latest economic projections, John Longworth, Director General of the British Chambers of Commerce, said:

“It is always disappointing when we have to downgrade our growth forecast but the unexpectedly low figures from the ONS on Q1 2015 make it unavoidable. While this slowdown will serve as a warning about the strength of our economic recovery, we believe the UK will secure steady growth in the years to come.”

Key elements of the economic forecast include:

Earnings and unemployment:

• The BCC forecasts total earnings growth (total pay including bonuses) of 2.4% in 2015, 4.0% in 2016 and 4.5% in 2017.
• UK unemployment, including  youth unemployment, is expected to fall in each of the next three years. However, by 2018, youth unemployment will still be high at 13% – almost three times the overall unemployment rate.

John Longworth, Director General of the British Chambers of Commerce, said:

“Families around the country will be heartened to hear that average earnings are on the up and unemployment is falling.  We forecast earnings growth will be significantly greater than inflation over the coming years. However, despite the progress in tackling unemployment, youth unemployment – while falling – will remain stubbornly high.

Trade deficit and exports

• The BCC forecasts the real net trade deficit will rise in 2015, increasing from 2.7% to 2.9%.
• Increases in real exports are predicted of 3.6% in 2015, 2.0% in 2016 and 2.2% in 2017.  For real imports the BCC predicts increases of 4.1% in 2015, 1.5% in 2016 and 1.7% in 2017.

John Longworth, Director General of the British Chambers of Commerce, said:

“The one area which causes most concern is the increasing trade deficit. The growth we see is built on consumer spend and this has been a systemic weakness for years. Despite good intentions, we are heading the wrong way. The trade deficit is an economic time-bomb waiting to go off. We have to confront it head-on and that means getting more of our businesses exporting their goods and services overseas. Restructuring our economy in this way remains the best route to securing high levels of sustainable growth over the long-term.”

Business investment

• Business investment is volatile but will remain relatively strong with 4.4% growth in 2015. However, this is lower than the 7.5% in 2014.

John Longworth, Director General of the British Chambers of Commerce, said:

“While we expect steady levels of business investment, the fall  from 2014 figures suggests the uncertainty over the annual investment allowance is acting as a drag on business decisions. In the Budget, we need the Chancellor to address this and unveil a long-term annual investment allowance which gives businesses clarity and certainty.”

Interest rates

• The BCC forecasts an increase in UK official interest rates is a year away, with a rise to 0.75% in Q2 2016. Rates will then be subject to small, incremental rises reaching 1.75% in Q4 2017.

John Longworth, Director General of the British Chambers of Commerce, said:

“It is right to keep rates at their current level for the next year at least and any increases thereafter should be slow and steady. After having stable, predictable rates for years – we don’t need the shock treatment of great leaps to the cost of borrowing.”

Reflecting on the overall economic forecast, John Longworth, Director General of the British Chambers of Commerce, said:

“The Government should be unapologetic in supporting British businesses and setting the regulatory and business finance systems to help them thrive. I want this to be the Parliament of growth. To deliver that we have to help businesses get the access to finance they need, and make a serious investment in our transport, digital and energy infrastructure. If we get these things right, British businesses will have the world as their oyster.”

David Kern, Chief Economist at the BCC, said:

“In spite of the downgrading of our 2015 growth forecast, UK prospects remain solid overall. The slowdown this year is likely to be temporary. Earlier falls in oil, food and other commodity prices continue to support UK growth, and Britain’s flexible and vibrant labour market is a major source of strength for our economy.

“International comparisons also show the UK is in a good position. In 2014, the UK grew faster than other G7 economies. Our new forecast suggests that we will remain near the top of the G7 league table over the next three years.

“But the UK recovery continues to face obstacles. Globally, confidence is too dependent on abnormally low interest rates and huge quantitative easing programmes. In spite of better eurozone prospects, a Greek default could trigger a new crisis, and, of course, the two largest global economies – the US and China – are experiencing slowdowns.

“Domestically, UK growth is relying unduly on consumer spending. Progress towards rebalancing the economy towards exports has been inadequate and the real trade deficit continues to get worse. This is troubling, especially at a time when we are carrying such a heavy current account deficit.

“The UK’s ability to generate tax revenues has worsened, due to big falls in oil and gas output and lower profits of UK banks. We will have to adjust to this harsher and more difficult reality. It is therefore vital that we focus on policies that support higher productivity and a strong recovery in exports, while persevering with the necessary and difficult job of cutting the fiscal deficit.”
Other elements from the economic forecast:

Main components of demand

• We forecast a slight upturn in household consumption growth to 2.6% in 2015, before easing to 2.4% in 2016 and 2.2% in 2017.
• UK business investment rose by 7.5% in 2014, but in Q1 2015 was only 3.7% higher than in Q1 2014. We are predicting business investment growth of 4.4% in 2015, 7.2% in 2016, and 7.4% in 2017.
• Our forecast is that the real net trade deficit will rise from 2.7% of GDP in 2014 to 2.9% in 2015 and then fall to 2.5% in 2017.
• Our forecast is that the UK current account deficit will improve gradually, from 5.5% of GDP in 2014 to 3.7% of GDP in 2017, this is still a very high and potentially risky shortfall.
• Our forecast envisages increases in real exports of 3.6% in 2015, 2.0% in 2016 and 2.2% in 2017.  For real imports we predict increases of 4.1% in 2015, 1.5% in 2016 and 1.7% in 2017.
• Quarterly GDP growth, after slowing to 0.3% in Q1 2015, is likely to accelerate to 0.7% in Q2 2015, and then stabilise at a trend rate of just over 0.6% per quarter from Q3 2015 onwards.

Main sectors of the economy

• Service sector output is forecast to grow by 2.8% in 2015%, 2.8% in 2016 and 2.8% in 2017. The share of services in total UK output is likely to rise a little further in the next few years.
• For total industrial output, we are forecasting growth of 0.9% in 2015, 1.5% in 2016 and 1.5% in 2017.
• We are forecasting full-year manufacturing growth of 1.4% in 2015, 2.0% in 2016 and 2.0% in 2017.
• Our forecast envisages growth in construction output of -0.7% in 2015, 2.2% in 2016 & 2.1% in 2017.

Official interest rates

• We expect the first increase in UK official interest rates, to 0.75%, in Q2 2016, one quarter later than we previously predicted.
• We expect to see incremental rises thereafter before reaching 1.75% in Q4 2017.

Earnings and unemployment

• We now predict that total earnings growth (total pay including bonuses) will average 2.4% in 2015, 4.0% in 2016 and 4.5% in 2017.
• The UK unemployment rate is forecast to fall from 5.5% in Q1 2015, to 5.0% in Q1 2016, 4.7% in Q1 2017 and 4.6% in Q1 2018.
• We are forecasting total UK unemployment to fall from 1.83m in Q1 2015, to 1.63m in Q1 2016, 1.58m in Q1 2017, and 1.54m in Q1 2018 – a net fall in the jobless total of 283,000 over the next 3 years.
• We are forecasting that total UK youth unemployment (people aged 16 to 24) will fall from 736,000 (a jobless rate of 15.9%) in Q1 2015, to 601,000 (a jobless rate of 13.0%) in Q1 2018, a net fall of 135,000.

Public finances

• Public sector net borrowing in the full financial year 2014/15 was £2.5bn lower than the OBR predicted in the March 2015 Budget. In 2015/16, we also expect slightly lower borrowing than the OBR predicted in the Budget.
• However, the OBR’s timetable for subsequent years is still 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 year longer (2019/20).

Inflation

• In annual average terms, we are forecasting annual CPI inflation at 0.2% in 2015, 1.5% in 2016 and 2.0% in 2017. In Q1 we predicted 0.3% in 2015, 1.7% in 2016 and 2.0% in 2017.