UK economy will slow amid Brexit talks and pay squeeze, warns CBI

Business group says growth will be subdued over the next two years but increases forecasts after strong 2016.

Business group the CBI has warned the UK economy will shift down a gear as Brexit talks get under way and households are squeezed by rising prices.

However, the cautious outlook was accompanied by an increase in the CBI’s growth forecasts for this year and next, due to a stronger than expected performance in 2016 when the economy defied expectations to grow strongly in the wake of the vote.

The employers’ body is now forecasting the UK economy will expand by 1.6% this year and 1.4% in 2018, up from its predictions in November for 1.3% and 1.1%, respectively. That would still mark a slowdown from 1.8% growth in 2016.

The group, which repeatedly warned against the economic consequences of a vote to leave, said economic growth would be subdued over the next two years.

“The UK economy has proved hardy in recent times, with firms up and down the UK getting on with what they do best by investing and creating jobs. Growth should be steady, if restrained, over the next couple of years as the pace of the economy shifts down a gear,” said Carolyn Fairbairn, the CBI director general.

Fairbairn warned the strain on households was likely to continue as the pound’s weakness since the Brexit vote pushed up the cost of imports and stoked inflation. But the pound’s weakness was likely to help exporters by making their goods and services more competitive in overseas markets.

“While the country’s exporters should emerge as a real catalyst of growth, rising inflation and stubbornly low wage growth mean that people are already starting to feel the pinch. Tighter purse strings mean slower household spending growth and uncertainty is likely to weigh on the minds of those making major investment decisions.”

The forecast followed official figures showing GDP growth slowed sharply to 0.2% in the opening quarter of 2017 after relatively strong expansion of 0.7% in the final quarter of 2016.

“Even accounting for weaker growth at the start of 2017, the momentum from last year gives us more of a lift as we move ahead, and this explains our higher annual growth forecast relative to November,” said Rain Newton-Smith, the CBI’s chief economist.

“But very little has changed in our view of the nature of the outlook. Growth will be slower in the years ahead as living standards are hit by rising inflation; and after some initial strength, uncertainty will weigh on business investment.”

Early economic indicators following the Brexit vote confounded gloomy forecasts for a sharp slowdown. But a year on from the referendum and as exit talks with other EU governments begin, the effects of a weak pound and uncertainty over future trading agreements are being felt.

Inflation has risen to its highest rate in four years, retail sales have slowed, businesses have reported that consumers are cutting back and the housing market appears to have lost momentum. Pay growth has weakened and fallen behind inflation, meaning workers are worse off in real terms.

The CBI said its latest forecast was for average quarterly GDP growth of 0.3% from the second half of this year – unchanged from its November outlook. That is half the average pace of growth from 2013 to 2016.

It expects wage growth to remain below inflation in 2017 and broadly match it in 2018. Consequently, household spending is forecast to slow markedly.

Business investment was expected to hold up over the near term, with CBI surveys pointing to an improvement in investment intentions since the referendum. “But with uncertainty still holding back larger spending projects, we expect investment to wane over the course of 2018,” the outlook added.

The forecasts were compiled before the general election, which resulted in Theresa May losing her parliamentary majority. Some economists have said that has weakened May’s hand in Brexit talks.

Fairbairn said the CBI and other lobby groups were pushing the government to give the business community a stronger say and more formal role in talks about future trade deals for the UK outside the EU. She said imitating countries such as Australia and Canada, where business groups are formally consulted in trade negotiations, would be a major benefit to Britain.

“They have confidential and formal structures and we have been calling for exactly that here. I think that we’re seeing real signs of progress,” Fairbairn said.