Economy benefiting from 'twin engines'
CBI says improving productivity will push growth to 2.6%
The business group says it has seen signs of recovering productivity and now expects stronger GDP growth this year of 2.6% (up from 2.4%) and 2.8% next (up from 2.5%).
It says stronger productivity in the first half of this year will feed through to stronger wage growth and it forecasts interest rates to rise to 0.75% from the current 0.5% early next year.
“Combined with continued low inflation from falling commodity prices, this gives a welcome boost to household spending,” it says.
“Furthermore, business investment is also likely to remain healthy, with our surveys indicating robust plans for capital spending.”
It believes the immediate risks in the eurozone have receded compared with earlier in the year, though a weaker outlook for China will weigh on global growth and a strengthening pound will eat into UK export competitiveness.
John Cridland, CBI Director-General, said: “We’re encouraged by the twin engined-growth of household spending, spurred by stronger wage increases and low inflation, buttressed by business investment.
“We’re also seeing tentative signs of productivity picking up.
“But the outlook on exports is somewhat muted: the strong pound is hampering our competitiveness abroad and growth in the Eurozone, our biggest trading partner, and will remain subdued for the foreseeable future, particularly given renewed uncertainty.”
Following more hawkish comments from the Bank of England recently, in combination with a bit more growth momentum, the CBI now expects interest rates to rise to 0.75% in the first quarter of 2016, and then rise at a slow pace thereafter.
“This is earlier than our previous prediction of an increase in Q2. Across the Atlantic, the US Federal Reserve looks likely to raise interest rates before Christmas.
“The UK’s labour market has sent mixed messages over the last couple of months, with employment falling and unemployment rising, while wage growth has continued to improve.
“But with GDP growth remaining robust over the second quarter, this suggests that productivity has risen.”