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Global Headwinds and Uncertainty Slow UK Growth in 2016

The British Chambers of Commerce (BCC) has today downgraded its UK GDP growth forecast, from 2.5% to 2.2% in 2016, and from 2.5% to 2.3% in 2017; for 2018, included for the first time in the forecast, GDP growth of 2.4% is predicted.

The downgrade is due to weaker than expected growth across most areas of the economy, reflecting a general global slowdown. Despite these issues, UK GDP is expected to expand at a moderate and relatively steady pace over the next three years.

Key points in the forecast:
• UK GDP growth forecasts downgraded: to 2.2% for 2016 and to 2.3% for 2017
• For 2018 – included for the first time – GDP growth of 2.4% is forecast
• Downgrade due to weaker than expected growth across most areas of the economy, mainly reflecting a general global slowdown.
• Lower than predicted actual growth in Q4 2015, and downward revisions of earlier ONS figures for the first three quarters of 2015, also contributed to the downgrade
• Services and consumer spending will remain the key growth drivers of the UK economy
• Quarterly UK GDP expected to grow by 0.5% in Q1 2016; thereafter, quarterly GDP growth is forecast to average slightly less than 0.6% per quarter from Q2 2016 onwards
• First expected increase in official interest rates, to 0.75% in Q4 2016 – one quarter later than predicted in the previous quarter

Dr Adam Marshall, Acting Director General of the British Chambers of Commerce, said:

“In the face of a slowing economy, and with further potential risks on the horizon, there is a case for sustained government action to improve prospects for business.

“Wherever possible, given very real fiscal constraints, the Chancellor must use his forthcoming Budget to bring forward road, rail, and digital infrastructure projects that would help UK companies do more business. He must also avoid adding further to the long list of new business costs and taxes introduced over recent months, which clobber firms before they turn over a single pound and undermine investment.

“Our forecast should stand as a wake-up call. The UK’s economic performance is reasonably good when measured against our main competitors, but it’s only mediocre when compared against long-term trends. Our trade deficit remains too high, and is not forecast to improve substantially over the next three years. In turbulent times, a consistent focus on improving infrastructure, sweeping away barriers to business investment, and supporting exporters would be a real recipe for success.”

David Kern, Chief Economist at the BCC, said:

“Though we have downgraded our growth forecast, UK GDP is expected to expand at a stronger pace than in most other G7 economies, and broadly in line with our long term trend. Growth will benefit from higher disposable incomes, low inflation and a strong labour market. Though services and consumer spending will remain the key growth drivers of the UK economy, our forecast envisages slower growth in these areas than we predicted previously.

“Weaker growth than previously expected in most UK sectors reflects a general global slowdown, which is due to lower productivity, adverse demographic trends and geo-political uncertainties. The worse net UK trade position that we are now predicting is mostly due to weaker global growth, but we do need to do more to boost exports.

“Worsening global trends will present the main dangers for the UK economy over the next few years. Given the unacceptable size of the current account deficit, failure to achieve a meaningful improvement in net exports will make the UK vulnerable to speculative attacks, and our credit rating could be at risk.”

Other elements from within the forecast

Main components of demand

• Annual average growth in household consumption is forecast to slow: from 3.0% in 2015 to 2.7% in 2016, 2.5% in 2017 and 2.4% in 2018.
• In calendar-year terms, UK business investment growth of 4.5% is predicted in 2016, 7.4% in 2017, and 7.4% in 2018
• In full-year terms, growth in real exports accelerated to 5.0% in 2015, but real exports fell in Q3 & Q4 2015. The new forecast is that real exports, in full-year terms, will grow by 2.3% in 2016, 3.0% in 2017, and 3.0% in 2018.
• The real net trade deficit, having risen to 3.3% of GDP in 2015, is forecast to rise further to 3.7% of GDP in 2016; it will then edge down marginally to 3.6% of GDP in both 2017 & 2018.

Main sectors of the economy

• Service sector output is forecast to grow by 2.6% in 2016, 2.7% in 2017 and 2.7% in 2018. The share of services in UK output is likely to rise further in the next few years and the sector will remain the biggest contributor to GDP growth.
• Manufacturing output is expected to grow more slowly than services, by 0.5% in 2016, 1.4% in 2017 and 1.4% in 2018.
• Total industrial output growth is forecast at 0.5% in 2016, 1.0% in 2017 and 1.0% in 2018.
• Construction output growth is forecast at 0.5% in 2016, 2.6% in 2016 & 2.6% in 2018.

Official interest rates
• The first increase in UK official interest rates to 0.75% is expected to occur in Q4 2016, one quarter later than previously predicted
• Further modest increases in official interest rates can then be expected, in small 0.25% steps, with official interest rates reaching 1.50% in Q4 2017

Unemployment and productivity

• The UK unemployment rate is forecast to fall from 5.1% in Q4 2015, to 4.9% in Q4 2016, 4.8% in Q4 2017 and 4.7% in Q7 2018.
• Net fall in total unemployment of 101,000 forecast over the next 3 years.
• Total youth unemployment (people aged 16 to 24) is expected to fall from 622,000 (a jobless rate of 13.6%) in Q4 2015, to 564,000 (a jobless rate of 12.1%) in Q4 2018, a net fall of 58,000.

Public finances

• UK public sector net borrowing is forecast to fall steadily over the next few years.
• But the official timetable for moving into budgetary surplus in 2019/20, outlined in the November 2015 Autumn Statement, is slightly too ambitious.
• The UK is likely to return to balance in 2019/20, but a move into surplus is only likely in 2020/21.

Inflation and earnings

• In annual average terms, annual CPI inflation is forecast at 0.9% in 2016, 1.8% in 2017 and 2.2% in 2018. In Q4 we predicted 1.1% in 2016 and 2.0% in 2017.
• Total earnings growth (total pay including bonuses) is predicted to average 2.6% in 2016, 3.5% in 2017 and 4.0% in 2018.
• The new forecasts for earnings growth are lower than those we made in Q4.