Weak trade and manufacturing figures nudge down UK growth forecast
The British Chambers of Commerce (BCC) has today downgraded its UK GDP growth forecast, from 2.6% to 2.4% in 2015, from 2.7% to 2.5% in 2016, and from 2.7% to 2.5% in 2017.
Weaker than expected net trade and manufacturing figures were the main reasons for the leading business group’s downgrading of its growth forecasts. The BCC believes the UK economy is set to continue expanding at a moderate pace, mostly driven by strong growth in the service sector and in consumer spending.
Key points in the forecast:
• UK GDP growth forecast downgraded, from 2.6% to 2.4% in 2015, from 2.7% to 2.5% in 2016, and from 2.7% to 2.5% in 2017
• The downgrade is mainly due to weaker than expected trade figures and a worse than predicted manufacturing performance, largely as a result of falling global prospects in recent months
• Lower than predicted actual GDP growth in Q3 2015 and downward ONS revisions of earlier estimates also contributed to the BCC’s downgrade
• Quarterly UK GDP growth is expected to average just over 0.6% per quarter from Q4 2015 onwards, in line with the economy’s long-term growth trend
• The service sector is forecast to grow by 2.7% in 2015, 2.9% in 2016 and 2.9% in 2017 (revised slightly from 2.8% in 2015, 2.9% in 2016 and 2.9% in 2017 in the previous forecast)
• The manufacturing sector is expected to contract by 0.2% in 2015, followed by growth of 0.7% in 2016, and 2.0% in 2017
• The first interest rate increase to 0.75% is expected in Q3 2016
John Longworth, Director General of the British Chambers of Commerce, said:
“Official data is starting to reflect what our Quarterly Economic Survey has been showing all year – that our persistently weak trade performance and current account balance are impacting our overall growth. Similarly, the manufacturing sector has been hit badly by falling global prospects, tipping an earlier prediction of growth in 2015 to an expected contraction.
“We cannot rely so heavily on consumer spending to fuel our economy, especially when driven by increased borrowing. We have been down this path before, and know that it leaves individuals and businesses exposed when interest rates do eventually rise.
“Not all debt is bad though. Better access to growth funding and working capital will help UK firms to achieve the scale needed to expand into export markets, which in turn creates jobs and growth at home. Investment in infrastructure is also crucial in enabling businesses to get their goods and services to market.
“The UK still needs to see a fundamental shift in its economic model if we are to remain relevant and prosperous in a changing world economy. Anyone who says that the job is nearly done needs to look again at the trade deficit, current account position and long-term business investment – and realise there’s still a long way to go.
“Government and business need to work together to provide UK firms with support similar to our international competitors if we are to begin to turn the tide of our trade deficit.”
David Kern, Chief Economist at the BCC, said:
“Despite our downgraded forecasts, GDP is likely to continue expanding broadly in line with the UK economy’s long term growth trend. However, services and household consumption remain the main drivers of UK growth, and their contribution to GDP is set to rise even further in the next few years.
“International uncertainties, coupled with undue reliance on excessive personal debt and a falling savings ratio, pose serious potential risks for the UK economy, although rising earnings and disposable incomes, lower inflation and a strong labour market will help growth.
“These dangers facing the UK economy make it important to sustain areas of domestic strength in order to underpin UK growth. While we expect the first increase in UK interest rates in Q3 2016, we believe that rising international uncertainty provides strong arguments for the MPC to delay this.”
Other elements from within the forecast
Main components of demand
• Annual average growth in household consumption is forecast to accelerate to 3.1% in 2015, before slowing to a still strong rate of 2.7% in 2016 and 2.6% in 2017
• UK business investment is predicted to grow by 6.2% in 2015, 7.4% 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 2.6% of GDP in 2017, a much smaller fall than we predicted in Q3
• Growth in real exports is forecast to be 3.5% in 2015, 3.4% in 2016, and 3.0% in 2017
Main sectors of the economy
• Service sector output is forecast to grow by 2.7% in 2015, 2.9% in 2016 and 2.9% in 2017. The share of services in total UK output is likely to rise further in the next few years
• Manufacturing output is expected to record negative growth of -0.2% in 2015, followed by positive growth of 0.7% in 2016, and 2.0% in 2017
• Total industrial output growth is forecast at 1.1% in 2015, 0.8% in 2016, and 1.3% in 2017
• Construction output growth is forecast at 2.3% in 2015, 0.9% in 2016, and 2.0% in 2017
Official interest rates
• The first increase in UK official interest rates to 0.75% is expected to occur in Q3 2016, one quarter later than we previously predicted
• Further modest increases in official interest rates can then be expected, in small 0.25% steps, with official interest rates reaching 1.75% in Q4 2017
Unemployment and productivity
• The UK unemployment rate is forecast to fall from 5.3% in Q3 2015, to 5.2% in Q2 2016, 5.1% in Q2 2017 and 5.0% in Q2 2018
• Total UK unemployment is forecast to fall from 1,749,000 in Q3 2015 to 1,724,000 in Q3 2016, 1,709,000 in Q3 2017, and to 1,694,000 in Q3 2018, a net overall fall in the jobless total of 55,000 over the next three years
• Total youth unemployment (people aged 16 to 24) is expected to fall from 726,000 (a jobless rate of 15.7%) in Q3 2015, to 692,000 (a jobless rate of 14.7%) in Q3 2018, a net fall of 34,000
• Productivity has been weak since the financial crisis, but has risen over the past year, and we expect a further gradual improvement in the next few years
• The UK public finances have improved in the current financial year, although there was a setback in October 2015
• The Chancellor’s new and more flexible medium-term fiscal consolidation timetable, outlined in the November 2015 Autumn Statement, is challenging but realistic
• We are now predicting that UK public sector net borrowing will move into surplus in 2019/20, which is also in line with the OBR’s November 2015 forecast
Inflation and earnings
• Annual CPI inflation will stay around zero for the next few months, before edging up slowly from Q1 2016 onwards, but will remain below the 2% target at least until mid-2017
• In annual average terms, we are forecasting annual CPI inflation at 0.1% in 2015, 1.1% in 2016 and 2.0% in 2017. In Q3 we predicted 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, 3.3% in 2016 and 4.0% in 2017
• The new earnings forecasts are slightly lower for 2016 and 2017 than those made in Q3