Economic growth has been volatile in the first half of 2019 due to pre-Brexit stockpiling and a surge in gold bullion pushing up imports growth. Further ahead, the economy is expected to grow at a modest pace. That’s according to the CBI. The UK’s leading business group now predicts GDP growth of 1.4% in 2019 and 1.5% in 2020. This is based on an orderly Brexit deal being ratified by October and the commencement of a smooth transition period thereafter.
A key driver of this growth is household spending (which grows by 1.7% in both 2019 and 2020), underpinned by a recent pick-up in real earnings. The CBI expects living standards to remain reasonably firm over the forecast period, giving impetus to household spending. However, growth is likely to remain below the average of recent years as the ongoing weakness in productivity holds back earnings, partially offsetting the upward pressure on wages from a tight labour market.
In contrast to the firmness in household spending, Brexit uncertainty continues to bite hard on business investment which remains very weak for this stage of the economic cycle. The CBI expects business investment to fall for much of the rest of this year (-1.3% in 2019, 0.9% in 2020). Under the CBI’s forecast assumption that a Brexit deal is ratified, firms are expected to gradually resume capital spending projects, in particular on new technology such as Artificial Intelligence and automation.
Nonetheless, growth in business investment is expected to remain somewhat modest, weighed upon by uncertainty around the end state of the UK-EU relationship.
Rain Newton-Smith, the CBI’s chief economist, stated: “Looking through the volatility in growth over the last six months, the CBI’s view of modest economic momentum ahead is largely unchanged. However, there’s a lot going on underneath the surface. The make-up of growth in our forecast is more skewed towards consumers. It’s certainly positive that household spending has more punch thanks to an improvement in living standards. Set against this, though, Brexit uncertainty is crippling business investment, which we expect to fall at the fastest pace since the financial crisis this year. It’s crystal clear that, without a Brexit deal by October, we’re at risk of falling further behind our G7 competitors.”