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Strong service sector and consumer spending drive UK growth upgrade

The British Chambers of Commerce (BCC) has upgraded its UK GDP growth forecast for the next three years, from 2.3% to 2.6% in 2015, 2.6% to 2.7% in 2016, and 2.6% to 2.7% in 2017. The principal driver for the leading business group’s forecast upgrade is stronger than previously expected growth in both the UK’s service sector and consumer spending.

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

“Services continue to be the key driver for economic growth, along with consumer spending. While business investment is growing well, and the most recent export figures are somewhat improved, we cannot yet say that the UK’s economic recovery is as broad-based as we would like.

“Securing long-term, sustainable growth will require continued action and vigilance.  The Bank of England must keep interest rates low for as long as possible, and ministers must have an undivided focus on fixing the fundamentals. Unless they help businesses by addressing deficiencies in education and training, investing in the UK’s inadequate infrastructure and improving access to growth finance, the upgrades to our growth forecasts may only be temporary.”

Economic Forecast Overview

• The BCC is upgrading its UK GDP growth forecasts from 2.3% to 2.6% in 2015, 2.6% to 2.7% in 2016, and 2.6% to 2.7% in 2017.
• The upgrade is due to stronger than previously expected growth in services output and in consumer spending, as well as an upward revision to Q1 2015 growth.
• Quarterly GDP growth, after accelerating to 0.7% in Q2 2015, is likely to stabilise at just under 0.7% per quarter from Q3 2015 onwards.
• The service sector is forecast to report growth of 2.8% in 2015, 2.9% in 2016 and 2.9% in 2017. In contrast, the manufacturing sector is expected to grow 0.8% in 2015, 1.9% in 2016, and 2.1% in 2017.
• We expect the first increase in official interest rates to 0.75% in Q2 2016, followed by small 0.25% increases until reaching 2.00% in Q4 2017.

John Longworth added:

“While the UK economy has made important progress in recent years, our forecast shows that the growth rate of services will be nearly four times that of manufacturing this year, and our export performance will continue to fall short.  There are also a number of external risks — including the sharp slowdown in China’s growth and continued uncertainty in the Eurozone — that could yet impact business confidence and performance here in the UK.

“Maintaining low interest rates will help to boost confidence and create a supportive environment for businesses in the short to medium term. Action by government to fix the fundamentals, both at the upcoming Spending Review and beyond, will help businesses to invest, export and create jobs.”
David Kern, Chief Economist at the BCC, said:

“Our upgraded growth forecast shows that the UK economy is on firm footing. Low inflation has given a welcome boost to households, and our vibrant and flexible labour market continues to be a source of strength. Services output and consumer spending remain the key drivers of growth for the economy. Business investment is improving, and is forecast to grow at a steady rate.

“While the immediate outlook is positive, there are both domestic and external headwinds facing the UK economy. Low productivity, and curbing the unacceptably large fiscal and external deficits, are the biggest challenges. Job creation may also be impacted by the large increases in the minimum wage.

“While the UK will remain near the top of the G7 league table, there is no room for complacency. Global uncertainty — including the current situation in China, weakness in the Eurozone, and the widely expected rise in US interest rates — could trigger further bumps in the road. Factors outside our own control reinforce the case for the Bank of England to keep interest rates on hold until well into 2016. Policies to fix the fundamentals will support higher productivity, promote a stronger recovery in exports, and will help with the job of cutting the fiscal deficit.”

Other elements of the forecast

Main components of demand
• UK household consumption is forecast to accelerate further to 3.1% in 2015, and to a still strong rate of 2.6% in both 2016 and in 2017.
• UK business investment is predicted to grow at 6.7% in 2015, 7.8% in 2016, and 7.4% in 2017.
• Our forecast is that the real net trade deficit will fall from 2.8% of GDP in 2014 to 2.3% of GDP in 2016, and then fall more gradually to 1.9% of GDP in 2017.
• Growth in real exports is forecast to be 6.8% in 2015, 3.5% in 2016, and 2.9% in 2017.
• The trade deficit in current prices is forecast to fall from 2.0% of GDP in 2014, to 1.6% of GDP in 2015 and 1.3% of GDP in both 2016 and 2017.
• The current account deficit is forecast to improve gradually from 5.9% of GDP in 2014 to 3.9% of GDP in 2017.

Main sectors of the economy
• Service sector output is forecast to grow by 2.8% in 2015, 2.9% in 2016 and 2.9% in 2017. The share of services in total UK output is likely to rise a little further in the next few years.
• Manufacturing output is forecast growth of 0.8% in 2015, 1.9% in 2016, and 2.1% in 2017.
• Total industrial output is forecast growth of 1.7% in 2015, 1.8% in 2016, and 1.6% in 2017 — after 1.7% growth in 2014.

Official interest rates
• The first increase in UK official interest rates to 0.75% is expected to occur in Q2 2016, the same date as we previously predicted. Further modest increases in official interest rates can then be expected, in small 0.25% steps, with official interest rates reaching 2.00% in Q4 2017.

Unemployment and productivity
• The UK unemployment rate is forecast to fall from 5.6% in Q2 2015, to 5.3% in Q2 2016, and 5.0% in Q2 2017; it will then stay at that level until Q2 2018.
• Total unemployment is expected to fall from 1,852,000 in Q2 2015, to 1,752,000 in Q2 2016, 1,667,000 in Q2 2017, and to 1,662,000 in Q2 2018, a net overall fall in the jobless total of 190,000 over the next 3 years.
• Total youth unemployment (people aged 16 to 24) is expected to fall from 739,000 (a jobless rate of 16.0%) in Q2 2015, to 695,000 (a jobless rate of 14.7%) in Q2 2018, a net fall of 44,000.
• Productivity has been weak since the financial crisis, but we expect a gradual improvement in the next few years.

Public finances
• Public finances improved further in recent months and for the full financial year 2015/16 we expect borrowing to be some £5.5bn lower than the OBR predicted in the July Budget. We now predict that UK public sector net borrowing will move into surplus in 2019/20.

Inflation and earnings
• In annual average terms, we are forecasting annual CPI inflation at 0.1% in 2015, 1.2% in 2016 and 2.0% in 2017.
• We are now predicting that total earnings growth (total pay including bonuses) will average 2.5% in 2015, 3.6% in 2016 and 4.3% in 2017.
Q3 Economic Forecast FULL REPORT