Monday, December 23, 2024

CBI predicts economy will see faster-than-expected growth as interest rates fall

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Britain’s economy will see faster-than-expected growth this year and next as the outlook brightens after a tough 2023, according to the CBI.

The business group has upped its forecasts for UK growth to 1% in 2024 and 1.9% in 2025 thanks to an expected pick-up in consumer spending as inflation falls back and wages remain robust.

It marks a upgrade on the CBI’s December predictions for expansion of 0.8% in 2024 and 1.6% in 2025 and comes after the UK eked out growth of a paltry 0.1% in 2023, having slipped into a technical recession at the end of last year.

The forecast also sees the CBI giving a much rosier outlook than the Bank of England, which predicted growth of 0.5% for this year in its last set of quarterly forecasts in May.

The CBI said: “Encouragingly, economic activity began to recover at the start of 2024.

“Robust growth over the first quarter completely reversed the decline in gross domestic product (GDP) seen over the second half of last year, and business surveys report that underlying economic momentum has been improving into the second quarter.”

The report also follows hot on the heels of an upgrade this week from fellow business group, the British Chambers of Commerce (BCC), which is now predicting growth of 0.8% in 2024 and 1% in 2025.

The CBI said the main driver of the improving picture is consumer spending,
The CBI said the main driver of the improving picture is consumer spending, (PA Archive)

The CBI said the main driver of the improving picture is consumer spending, which it expects to rise by 0.8% this year, rising to 2.5% next year, as inflation is set to drop back to the Bank’s 2% target in the second quarter.

“Nevertheless, households will feel the pinch this year from the cumulative increase in the level of prices over the last three years, in addition to still relatively higher lending rates,” the CBI cautioned.

After falling to target, inflation is expected to pick up again at the end of the year, before falling back to 2% more sustainably in 2025.

The CBI is predicting that interest rates will start to come down from their current level of 5.25% in August, before falling steadily to 3.5% between April and June next year.

Louise Hellem, CBI chief economist, said: “It’s encouraging to see that the outlook for the UK economy is improving after a difficult 2023.

“However, we cannot afford to be complacent about our progress going forward,” she added.

“To ensure longer-term, sustainable growth, we must tackle our ongoing productivity problem.”

The CBI also warned the stronger outlook was unlikely to offer much in the way of room for tax cuts for the next government.

Martin Sartorius, principal economist at the CBI, said: “While our forecast for stronger GDP growth means that the public finances outlook has improved, the next government will still face a difficult fiscal inheritance.

“This implies that there will not be much room for significant fiscal stimulus over our forecast period.”

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