UK economy will pick up through 2012 says CBI

03 May 2012

The UK economy will see growth resume in the second half of 2012, with faster GDP growth during 2013, according to the latest quarterly CBI economic forecast. The CBI expects GDP growth in 2012 will be 0.6%, slightly down from its forecast in February of 0.9%. Despite this, growth prospects remain broadly unchanged for the latter half of the year and, in 2013, the CBI forecasts GDP growth to be 2.0%.

Quarter-on-quarter growth is expected to be flat in the second quarter of 2012 (0%), affected by the impact of the additional bank holiday for the Diamond Jubilee. However, there will be an improvement in the second half of the year (0.7%, 0.5%), reflecting an improving global economy and an expected easing in inflationary pressures, plus a slight boost from the Olympics and a bounce back from the second quarter.

While inflation is expected to be somewhat higher than previously thought throughout 2012, in part due to recent oil price rises, it should continue on a downward trend and come close to hitting the Bank of England’s target in the spring of 2013.

Household spending will remain subdued, with weak wage growth and unemployment rising to a peak of 2.86 million in the first quarter of 2013, but prospects should improve next year as inflation continues to fall further and disposable incomes begin to recover.

As recent surveys have indicated, uncertainty over demand is easing and, as a result, there will be a modest rise in business investment, growing at around 4% in 2012 and 5% next year.

Exports are forecast to see a small rise this year (1.5%), affected by lower levels of economic activity in the Eurozone area, but are expected to increase by around 6% in 2013, as the global economic outlook strengthens.

CBI director-general, John Cridland (pictured) said: “Despite the disappointing GDP estimate for the first quarter from the ONS, we still think the UK economy will grow in 2012, with faster growth next year. Optimism among businesses has been increasing since the turn of the year, with manufacturing demand holding up. And that is beginning to translate into more jobs and investment.

“That said, the global economy continues to pose a number of significant challenges. Concerns over Eurozone stability are on the rise again, oil prices remain high and confidence among businesses and households are still fragile. We have always said that the path back to sustainable economic growth will be a long and difficult one, with many bumps along the way. To re-balance our economy towards exports and investment will take time and patience.”

With the economy slightly weaker than believed at the time of the March budget, public sector borrowing is expected to be some £6-8 billion higher than forecast by the OBR, at £128.2 billion in 2012/13 and £104.1 billion in 2013/14.

Interest rates are expected to remain unchanged throughout most of the forecast period, with a rise expected in the final quarter of 2013.

CBI chief economic adviser, Ian McCafferty comments: “Over the winter, the economy has been bumping along the bottom, and with the distortions from an extra bank holiday in the second quarter, is likely to stay that way until summer. Nevertheless, business surveys suggest that underlying conditions are starting to improve, and that we should see more momentum in the second half of the year. Although inflation has been higher than expected, we believe that it should continue to fall towards the Bank’s target of 2% by the spring of next year. This will help lift some of the squeeze on household incomes and boost business confidence.”