The British Chambers of Commerce (BCC) has downgraded its growth expectations for the UK economy, forecasting GDP growth for 2018 at just 1.1% (down from 1.3%).
The BCC has also downgraded its GDP growth forecast for 2019 from 1.4% to 1.3%. Our latest forecast implies that by 2020 the UK economy will have experienced its second weakest decade of average annual GDP growth on record.
The downgrades to our forecast for GDP growth in 2018 and 2019 have been largely driven by a weaker outlook for trade and investment. Exporters face more subdued growth given continued Brexit uncertainty and the expected slower growth in key markets. As a consequence, net trade is expected to make a negative contribution to GDP growth over the forecast period.
The outlook for investment is more subdued than in our previous forecast with persistent economic and political uncertainty expected to increasingly weigh on investment intentions. Business investment growth is expected to be weaker across the forecast horizon than in our Q2 forecast. The high upfront cost of doing business in the UK and the ongoing uncertainty over the UK’s future relationship with the EU are expected to continue to stifle business investment.
The labour market is expected to continue to be a source of strength for the economy, with the unemployment rate forecasted to remain close to its record low. However, in such a tight labour market, businesses will continue to face significant skills gaps, undermining their potential to grow. At the same time, workers are unlikely to experience meaningful real wage growth as the gap between pay and price growth is forecast to remain negligible.
If realised, the leading business organisation’s latest forecast suggests that the UK economy remains lethargic. Brexit uncertainty and the on-going failure to fix domestic fundamentals – stronger labour supply, digital and physical connectivity, and more – are hurting the UK’s growth prospects. To bolster stronger growth, the government must provide precision on the nature of any future relationship with the EU and answer the practical questions that firms have – a ‘messy’, disorderly Brexit will only add to the uncertainty that already exists. The BCC has outlined and is assessing the key questions that businesses need clarity on in order to take decisions, invest and plan for the future.
Alongside the forecast, the BCC warns the Prime Minister and Chancellor that the government’s upcoming Autumn Budget cannot be a ’business as usual’ affair. Ministers must go all-out to incentivise and kickstart business investment at a crucial turning point for the UK.
Key points in the forecast:
• UK GDP growth forecast for 2018 is downgraded from 1.3% to 1.1%, and from 1.4% to 1.3% for 2019, before rising to 1.6% in 2020 (unchanged)
• Growth in household consumption for 2018 is expected to slow to 1.0%, before rising to 1.3% in 2019 and 1.7% in 2020, largely unchanged from the previous forecast
• Average earnings growth will slightly outstrip inflation over the forecast period, with growth of 2.6%, 2.8%, and 3.0%, compared with inflation of 2.5%, 2.3%, and 1.8%
• BCC forecasts export growth of 1.7% in 2018 – down from 2.8% in the previous forecast – this is due to revisions of previous data. We expect a negative contribution from trade over the forecast period
• Total investment growth of 1.4% in 2018 (down from 1.8% in the previous forecast) with growth of 1.4% in 2019 and 1.5% in 2020
• Business investment is expected to remain weak, with growth of 1.0% in 2018, 1.2% in 2019, and 1.4% in 2020
• We now anticipate interest rates rising to 1.25% by the end of the forecast period, with rate rises expected in Q1 2019 and Q2 2020.
Dr Adam Marshall, Director General of the British Chambers of Commerce (BCC), said:
“Despite strong performances by some firms, the UK economy as a whole is set to grow at a snail’s pace. Brexit uncertainty continues to weigh heavily on many firms, as most of the practical questions facing trading businesses remain unanswered. The lack of precision on the nature of the UK’s future relationship with the EU is lowering expectations for both business investment and export growth.
“The drag effect on investment and trade would intensify in the event of a ‘messy’ and disorderly Brexit. Businesses need the Brexit negotiations to deliver clarity, precision and results at pace over the coming weeks.
“A deal with Brussels won’t deliver stronger UK growth on its own. The Prime Minister and the Chancellor must now pull out all the stops here at home to bolster business confidence, slash costs, and crowd in investment. At a time of massive change and uncertainty, business would not forgive a timid ‘business as usual’ Autumn Budget, nor tax hikes that make UK companies less competitive around the world.”
On skills and labour, Marshall added:
“Our forecast makes clear that there is no room for ministers to kick the can further on the UK’s future immigration policy. Businesses need to know, now, that they can hire the people they need after Brexit - without being tied up in reams of new costly red tape.”
Suren Thiru, Head of Economics at the British Chambers of Commerce, said:
“The changes to our forecast indicate that the UK economy is in for a testing period, with persistent uncertainty and the possibility of a disorderly EU exit increasingly weighing on the UK’s growth prospects.
“Mounting uncertainty and the cost of doing business in the UK is likely to put a brake on investment intentions, while for exporters a combination of moderating growth in key trading markets and Brexit uncertainty are forecast to limit export activity. Consumer spending is unlikely to offset the predicted weakness in investment and trade with real wage growth expected to remain muted across the forecast horizon.
“The persistent failure to lift the UK economic speed limit by taking sustained action to boost productivity, from closing the skills gap to greater infrastructure investment, continues to limit the UK’s growth potential and leaves the UK more susceptible to external economic shocks.
“Despite the downgrades to our growth forecast, the risks to our outlook remain tilted to the downside. A messy Brexit could further limit the extent to which the UK economy is able to grow, while the prospect of a renewed decline in sterling could increase the squeeze on consumers and businesses. A material broadening of global trade disputes, could also weigh further on economic activity in the UK.”