GDP to exceed pre-recession peak earlier than expected
• BCC upgrades GDP growth forecasts from 2.7% to 2.8% in 2014 and from 2.4% to 2.5% in 2015
• UK GDP expected to exceed its pre-recession peak in Q2 2014 – one quarter earlier than we forecast in December
• The first increase in UK interest rates expected in Q3 2015 to 0.75%
• BCC predicts that wage growth will exceed inflation from mid-2014
• The youth unemployment rate is expected to remain almost three times the national average over the forecast period (2014 – 2016)
The British Chambers of Commerce (BCC) has today upgraded its growth forecasts for the next two years – from 2.7% to 2.8% in 2014 and from 2.4% to 2.5% in 2015. For 2016 (included in our forecast for the first time) we are expecting growth of 2.5%.
The Q1 2014 Economic Forecast conveys increasing business optimism, with GDP expected to exceed its pre-recession peak in Q2 2014 – a quarter earlier than we predicted in December 2013.
John Longworth, BCC Director General, says that the economy is ‘gaining momentum’ and pays tribute to businesses across the UK that have fought hard to grow and create jobs. However, Mr Longworth also warns that major issues remain as the economy still faces long-term challenges despite recent progress.
ECONOMIC FORECAST – OVERVIEW
• The BCC is raising its GDP growth forecast to 2.8% in 2014 and to 2.5% in 2015. The upgrades for 2014 and 2015 are mainly due to upward revisions to historic GDP data by the ONS. For 2016 (included in our forecast for the first time) we are expecting growth of 2.5%.
• GDP is likely to exceed its Q1 2008 pre-recession peak in Q2 2014 – one quarter earlier than we predicted in December 2013. • UK GDP quarterly growth is forecast at 0.7% in Q1 2014, easing slightly to 0.6% in Q2 2014, before averaging 0.6% per quarter until the end of 2016.
• The main contributors to UK GDP growth in the next three years will be household consumption and output from services. • After reaching 2.4% in 2013, growth in household consumption will continue at 2.4% in 2014, and will edge up to 2.5% in 2015 and 2016.
• Service sector output is forecast to record growth of 2.9% in 2014, 2.7% in 2015, and 2.7% in 2016.
• BCC expects the unemployment rate to fall from 7.2% in Q4 2013 to 6.0% in Q4 2016. The youth unemployment rate (16-24 year-olds) will remain close to three times the national average, falling from 19.9% in Q4 2013 to 17.8% in Q4 2016.
• Business investment is expected to record strong growth of 6.6% in 2014, 5.7% in 2015, and 5.7% in 2016. Even so, business investment in 2016 will still be slightly lower than in 2008.
• We are predicting that the first increase in official UK interest rates will be in Q3 2015 to 0.75% – one quarter earlier than previously forecast. We expect this will be followed by modest increases in 0.25% steps to reach 1.50% in the second half of 2016.
Commenting, John Longworth, Director General of the British Chambers of Commerce (BCC), said:
“Our economic recovery is gaining momentum. Businesses across the UK are expanding and creating jobs, and our increasingly sunny predictions for growth are a testament to their drive and ambition. Our new forecast shows that the service sector is performing particularly well, and is likely to be a key driver of growth. And the manufacturing sector, although small, is pulling its weight too, and will play an important role in sustaining our recovery.
“But it’s not time to break out the champagne glasses just yet. Major issues remain, such as the unacceptably high level of youth unemployment. We urge the Chancellor to use this month’s Budget wisely by incentivising businesses to hire young people so that the next generation of workers are not left behind.
“Crucially, Britain is simply not investing enough. While business investment is expected to grow, it will remain way below pre-crisis levels for some time. There is also more to do in securing access to finance for growing firms – as this too will be crucial to securing our economic future. So is getting public and private sector funding together to address the crippling gaps in our transport, digital and energy infrastructure.
“We just hope that as the General Election gets closer, politicians are not tempted to abandon a drive for long-term economic security in favour of short-term vote winners. No government over the next decade can afford to get distracted – and our leaders must do everything in their power to ensure the economy goes from being merely good, to being truly great.”
David Kern, Chief Economist at the BCC, added:
“The upgrades to our growth forecasts are largely due to revisions to historic GDP data by the ONS. The good news is that GDP growth is expected to remain well above 2% for the next three years, and is likely to exceed its pre-recession peak in the second quarter of 2014 – a quarter earlier than we predicted in late 2013. This shows that the economy is on the right track, but we mustn’t be fooled into thinking that it is back up to full strength just yet.
“The UK’s current account deficit remains excessive, and without a stronger rebalancing towards net exports, we could face serious risks to our long term economic health. In addition, while business investment is set to pick up, it is still far behind our pre-crisis peak. If we are to better this, we need higher productivity. What’s more, businesses will only increase their capital if the current environment of low inflation and low interest rates persists.
“The revamped forward guidance policy goes some way to easing business concerns, and the long-term security will encourage them to invest. However some MPC members seem to be signalling early interest rate rises. This kind of unhelpful speculation will only prevent business from investing and put pressure on an already strong pound, which could put the recovery at risk.”
OTHER ELEMENTS FROM WITHIN THE FORECAST
Main components of demand
• We are expecting household consumption to grow by 2.4% in 2014, before edging up to 2.5% in 2015 and 2016. The new forecasts are lower than in Q4, reflecting the sharp slowdown in Q4 2013.
• We forecast business investment to record relatively strong positive growth of 6.6% in 2014, 5.7% in 2015, and 5.7% in 2016. However business investment in 2016 will still be lower than in 2008, both in absolute terms and as a proportion of GDP.
• The trade balance: the overall trade deficit is now smaller than before the financial crisis, largely due to trade surpluses in the services sector. The total trade deficit is forecast to fall from 1.6% of GDP in 2013 to 1.0% in 2016.
Main sectors of the economy
• Total industrial output is forecast to grow by 1.5% in 2014, 1.1% in 2015 and 1.2% in 2016.
• Manufacturing output is unchanged from our previous forecast, with expected growth of 2.0% in 2014, 1.4% in 2015. We are predicting manufacturing output of 1.4% in 2016.
• Construction output is expected to grow by 4.0% in 2014, 3.0% in 2015, and 2.8% in 2016.
• The services sector, the long-standing driver of the economic recovery, is forecast to grow by 2.9% in 2014, 2.7% in 2015, and 2.7% in 2016 – slightly stronger than anticipated GDP growth.
Unemployment and productivity
• We forecast that the unemployment rate will fall from 7.2% in Q4 2013 to 6.8% in 2014, 6.4% in Q4 2015 and 6.0% in Q4 2016. • We are expecting UK unemployment to fall from 2.3 million in Q4 2013, to 2.2 million in Q4 2014, to 2.1 million in Q4 2015, and to 2 million in Q4 2016 – a net overall fall if 330,000 over the next three years.
• We expect youth unemployment (people aged 16-24) will fall from 917,000 (a jobless rate of 19.9%) in Q4 2013 to 818,000 (a jobless rate of 17.8%) in Q4 2016, a modest fall but still far too high.
• Productivity: over the next three years we forecast that output per worker is expected to increase in total by 3.4% and output per hour by 2.8%. This will still be marginally below its Q1 2008 level.
• UK public finances: the forecast outlined by the OBR in the December 2013 Autumn Statement is realistic in predicting steady falls in borrowing, but their timetable is slightly too ambitious.
• While the OBR is forecasting that the UK would reach a small budget surplus in 2018/19, we feel that this would take one-two years longer.
• In annual average terms, we are forecasting annual CPI inflation to be 2.0% in 2014, 2.0% in 2015, and 2.0% in 2016. In Q4 2013 we predicted 2.5% in 2014 and 2.3% in 2015.
Official interest rates
• We expect the first increase in UK official interest rates to occur in Q3 2015 to reach 0.75% – one quarter earlier than previously envisaged in the last forecast.
• Further modest increases can then be expected, in 0.25% steps, to reach 1.50% in the second half of 2016.