The CBI has raised its growth forecasts for 2013 and 2014 and expects growth to gather pace in 2015 as the recovery continues to build steadily. Business investment and net trade are also expected to provide increasing support to growth over the coming years.
Unveiling its latest economic forecast the UK's leading business group is forecasting GDP growth of 1.4% in 2013, up from 1.2% in its August forecast, after better than expected GDP growth in the third quarter and following signs of a pick-up in confidence across a broad range of sectors, including services, construction and manufacturing.
Quarter-on-quarter growth is expected to soften in the final quarter of 2013 (0.5%), in part reflecting some volatility in the trade and investment data.
In 2014 and 2015, the CBI expects the recovery to gather pace, forecasting 2.4% GDP growth in 2014 (up slightly from 2.3% in August), rising to 2.6% growth in 2015, with domestic demand supported by increases in business and housing investment and household disposable income.
Quarter-on-quarter growth of 0.6% is expected in each quarter of 2014 as government spending begins to drag on GDP. While imports will continue to grow as the UK's domestic situation improves, a return to growth in the Euro area, a broader global recovery and the resulting positive boost to exports should see a positive net trade contribution to growth in 2014 and 2015.
John Cridland, CBI Director-General, said:
"The UK is now set fair for growth with confidence returning to Britain's entrepreneurs.
"The recovery that started in the service sector has fanned out to manufacturing and construction, and is shaping up to be more broad-based.
"The recovery won't be spectacular, just slow and steady, but appears more solid and better-rooted.
"We're also expecting business investment to pick up over the next two years and beyond, and net trade will begin to make a stronger contribution to growth. By 2015, the CBI is forecasting growth of 2.6%."
Drivers of growth to broaden
Household spending is expected to slowly strengthen through 2014 and 2015, as confidence lifts and credit conditions continue to improve, reducing the precautionary impulse to save. This will be increasingly supported by improving consumer spending power as earnings begin to grow more strongly and inflation falls back.
Meanwhile, business investment and exports are forecast to gradually strengthen. Business investment growth is forecast to improve from -4.9% in 2013 to 6.9% in 2014 and 8.3% in 2015.
Export growth is expected to increase from 1.3% in 2013 to 3.6% in 2014 and 5.1% in 2015, and the net contribution of trade to GDP growth will increase slightly, though remain relatively muted as domestic demand boosts import growth from 0.3% in 2013 to 2.2% in 2014 and 4.2% in 2015.
Interest rates on hold in 2014 and 2015
The CBI forecasts that the unemployment rate will be 7.7% in 2013, falling to 7.5% in 2014 and 7.3% in 2015. We expect unemployment to come down relatively slowly over the medium-term, as hours worked increase and productivity begins to recover. Consequently, the CBI expects Bank rate to remain on hold in 2014 and 2015.
Stephen Gifford, CBI Director of Economics, said:
"Consumer spending will rise, underpinned by increased confidence, improved credit conditions and a gradual pick-up in real incomes.
"But risks remain, despite the relatively stable global environment of the past year, with financial markets moving to a new regulatory environment, the Eurozone continuing to evolve, emerging markets facing structural change and the challenge of unwinding unconventional monetary policies."