11 June 2018 | By Alpesh Paleja Insight

UK needs to move out of the slow lane

After a chilly start to the year, Alpesh Paleja gives the low-down on the CBI’s latest economic forecast

The UK economy wobbled at the start to 2018, as the Beast from the East caused GDP growth to near-flatline (at just 0.1 per cent). A key question is whether all the weakness in Q1 was down to the snow, or whether it marks the start of another shift down in economic growth. Reassuringly, survey data for Q2 so far suggests most of the blame lies with the weather, as it points to some recovery in growth: of around 0.4-0.5 per cent.

Growth to stay sluggish

But the hit from poor weather came at an already tough time for the economy. By now, the story of post-referendum growth is well-known: the fall in the pound following Brexit pushed up inflation, eating into households’ pay packets and spending. Furthermore, uncertainty over our future relationship with the EU looms large over business’ investment plans.

That story has played out pretty much as the CBI expected. So our forecast is broadly unchanged – we expect the economy to grow by 1.4 per cent in 2018 and 1.3 per cent in 2019.

Households under pressure

The key economic themes we’ve seen over the last year will continue to play out.

Household spending will remain under pressure, though the worst of the consumer squeeze appears to be over. We expect only a gradual pick up in wage growth, as weak productivity limits the scope for significant pay rises. Because consumer spending makes up two-thirds of the economy, its weakness has a large impact on GDP growth in our forecast.

Skill shortages spurring innovation…

The perennial weakness in productivity is offsetting some of the upward pressure on pay from a tight labour market. Both our members and surveys tell us that skill shortages remain acute across the economy.

Businesses are responding to this in different ways. In particular, more and more companies are looking at investing in automation, artificial intelligence (AI) and robotics. There is also clearly a growing focus on retention, re-training and upskilling.

…but Brexit uncertainty still looms large

But the spectre of Brexit uncertainty continues to lurk over business investment. Notwithstanding the growing focus on AI and automation, businesses are still putting the brakes on big capex projects, pending further clarity on the UK’s future relationship with the EU. This corroborates the investment intentions data in our business surveys, which remain subdued.

Global growth strong

With everything going on at home, it’s easy to forget there is a whole other world out there; and the global economy is seeing strong and broad-based growth. While there are signs that we may be at the peak of the upturn, we expect solid global momentum to continue.

Combined with the low pound, this has delivered a welcome boost to UK exports. Net trade already registered a substantial boost to GDP in 2017, and we expect it to continue lifting growth over our forecast.

UK needs to move out of the slow lane

While risks to growth remain high – particularly via the Brexit channel – there is much that can be done to improve productivity and drive prosperity. Businesses are doing what they can to stay competitive, but firms and government must work together over the longer-term to drive growth and create wealth. Good examples include pressing ahead with creating extra capacity at Heathrow, and furthering technical education routes to build skills fit for the 21st century.

Measures such as these will double-down on business efforts to boost competitiveness and productivity, and help propel UK growth out of the slow lane.

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