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As Bank of Scotland reports jobs market cooling...

CBI upgrades UK economic growth to 2.7% on back of more jobs and low oil price

Jobs advertsRapid job creation, low oil prices and near-zero inflation have led the CBI to upgrade its growth forecast for this year.

The employers’s body now believes the economy will expand by 2.7% this year against 2.5% predicted only last November and is also based on the Bank of England keeping interest rates on hold until 2016.

However, it remains concerned about political volatility, both domestic and foreign, as the UK general election approaches. Greece’s fiscal position remains in the spotlight and instability continues in Ukraine, it says.

“As a result, exporters are finding it harder to secure orders and net trade is unlikely to provide much of a boost to growth over the next two years.”

Katja Hall, CBI deputy director-general, said: “UK growth continues to outshine its counterparts in Europe and progress is ‘steady as she goes’.

“While lower oil prices are keeping costs down for businesses and consumers, the North Sea oil companies are suffering, harming jobs and investment in the industry.

“Now is not the time for complacency, but falling unemployment coupled with improving wage growth and rock bottom inflation should mean that people see more money in their pockets. But businesses are looking on anxiously as insecurity continues to troll the Eurozone and instability remains elsewhere.”

The revised outlook coincides with publication of January’s Bank of Scotland Report on Jobs which has indicated a cooling in Scotland’s jobs market at the start of the year, with growth of permanent appointments slowing and temp billings down from December. Growth of staff pay moderated from recent highs, while demand for staff also increased at a reduced rate. Candidate availability continued to deteriorate rapidly, with the supply of candidates for permanent positions falling more quickly than those for temp roles.

The bank’s Labour Market Barometer fell from December’s 63.2 to 60.0 in January, its lowest reading since September 2013. That said, the barometer still pointed to a marked improvement in Scotland’s labour market conditions overall.

Donald MacRae, the bank’s chief economist, said: “Scotland’s jobs market continued to improve in January but showed signs of cooling. The number of people appointed to permanent jobs rose but temporary appointments fell. Vacancies continued to increase across most sectors accompanied by a rise in starting salaries although lower than December’s near record high.  This Report on Jobs suggests the Scottish economy continues to grow at the start of 2015 but at a slower rate than the end of last year.”

 According to the CBI forecast, GDP growth is expected to remain steady throughout this year, rising by 0.7% each quarter. GDP is then forecast to grow strongly in 2016, by 2.6% over the year as a whole. This translates into growth of 0.6% a quarter.

The price of oil is expected to remain below $65 per barrel by the end of 2016. On the back of lower oil prices, consumer price inflation is expected to stay below 1% throughout most of 2015.

While the risk of deflation is growing, the CBI does not see a sustained period of widespread falling prices as likely, with the downward pressure from the oil price effect unwinding over time.

Alongside household spending, business investment is expected to continue providing sturdy support to GDP growth, rising by 5.8% this year and by 6.5% in 2016 as the UK’s expansion becomes further embedded.

In contrast, the UK’s export performance has remained disappointing. The CBI expects some improvement ahead, with growth increasing from 2.9% this year to 5.5% in 2016. But with import growth set to rise firmly due to strong domestic demand, the net trade contribution to GDP growth will be small at best.

A weak export backdrop is likely to weigh on the outlook for manufacturing output. While growth is expected to improve slowly, from 1.5% in Q1 2015 to 1.8% by the end of 2016, it will remain underwhelming.

More positively, the UK unemployment rate is expected to continue its downward trend in 2015 and into next year, levelling off at 5.2%, while wage growth is expected to reach 3.0% by Q4 2016.

Rain Newton-Smith, CBI director for economics, said: “The UK is in good shape compared with other economies, with both investment and household spending underpinning economic growth. But there are still risks to exports from a shaky Eurozone.

“With finance ministers from across the bloc meeting today, it is vital that they reach a new deal on the bailout programme for Greece to give businesses the certainty they crave around prospects in the Eurozone.

“Sterling’s recent high against the Euro also adds to the challenges for manufacturing securing further export orders.”

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