CBI forecasts revival in the economy but consumer spending will be subdued
The CBI’s economic forecast, out today (Monday), points to a modest pick up in activity through 2006, but the economy will not return to its trend rate of growth until 2007.
The increased growth is driven by an improvement in exports, a continuation of strong Government spending and a modest consumer recovery – though this remains constrained by debt burdens and high energy costs.
Its quarterly UK GDP growth forecast for 2005 has been revised down by 0.2 per cent to 1.7 per cent, following the previous downgrade to 1.9 per cent in the CBI’s August forecast.
Looking forward, strong government consumption and fixed investment, as well as the better trade picture, will bolster GDP, reaching 2.2 per cent growth in 2006 and 2.5 per cent growth in 2007.
Commenting on the revised forecast, CBI Chief Economist Ian McCafferty said “The outlook for the economy appears to be another year of below trend growth followed by a healthier picture in 2007. With the housing market showing signs of stabilising, we believe that the consumer will regain some confidence, allowing household spending to pick up a little. “Nevertheless, spending power will be constrained by high energy costs and an unwillingness to borrow, by the past burden of debt and all those ‘need to save’ headlines.
“As a result, the recovery will have to rely on a pick-up in exports too, so it is fortunate that the world economy appears to be proving very resilient.
“But the fact that the consumer can no longer act as the motor for growth does make the UK economy highly vulnerable should developments in the rest of the world turn sour unexpectedly.”
Earnings growth is expected to remain broadly flat over the forecast period and consumer spending is likely to remain weaker than seen in recent years, growing broadly in line with real disposable income.
Following a modest slowdown in 2005, the world economy is expected to pick up through 2006 and into 2007. Export growth is expected to improve in 2006 and marginally outpace import growth in 2007.
Manufacturing output is also expected to respond to increased global demand between 2006 and 2007, growing at 0.8 per cent and 1.3 per cent respectively following its contraction this year.
Inflation rose to 2.4 per cent in the third quarter of this year, pushed upwards by high energy prices. It is expected to dip slightly below the Bank of England’s target of 2 per cent by the end of 2006, before edging back up to meet it a year later. Diminishing inflationary pressures and the subdued performance of the economy provide room for a quarter point cut in interest rates in February 2006. The CBI expects rates to then remain unchanged until the end of 2007.
Manufacturing employment will continue to decline over the next two years, while employment in other sectors is set to increase.
