Dear All,
SAVE THE DATE: FoB AGM and Annual Conference 23rd May 2018. Venue: One Great George Street, London SW1.
Have a good week.
Gordon Polson – Director
CBI Economic Forecast:
GDP
UK GDP growth has been fairly lukewarm over 2017 so far, averaging 0.3% per quarter—almost half the average rate seen since 2013. Our business surveys suggest that momentum has remained tepid going into Q4. Conditions are particularly challenging for consumer-facing sectors, which have been hit by falling real household earnings. However, conditions in the manufacturing sector are more upbeat, with exporting firms continuing to benefit from competitiveness gains from the lower pound. But across the board, cost pressures remain elevated, as the weaker exchange rate pushes up the price of imported goods.
We expect subdued economic growth to persist ahead. Our latest forecast is for GDP growth of 1.5% in both 2017 and 2018 (from 1.8% in 2016)—broadly unchanged from our previous forecast. The key drivers of our growth outlook remain the same: household spending remains under pressure from squeezed real earnings; uncertainty over Brexit weighs on business investment; but net exports see more of a boost, aided by the lower pound and strong global growth.
We are forecasting similarly muted growth in 2019, of 1.3%. Our forecast assumes that agreement with the EU on a time-limited transition period is reached sometime in Q1 2018, and implemented upon the expiry of Article 50 in March 2019—thus ensuring a relatively smooth transition to a new relationship with the EU. The main drivers of our forecast remain unchanged in 2019, with domestic demand staying soft but support from net trade continuing.
The downside risks to our forecast remain high, particularly in 2019, when a more disorderly outcome from EU negotiations could have a more adverse impact on economic activity and financial markets.
Monetary policy and inflation
The Monetary Policy Committee (MPC) voted 7-2 to raise interest rates in November (by 25 basis points, to 0.5%), marking the first rate rise in over ten years. The decision was mostly driven by greater pessimism regarding the economy’s supply potential: the MPC believe that years of weak productivity growth have reduced the economy’s ability to grow without stoking inflation. So even though the MPC expect only modest GDP growth ahead, they still expect CPI inflation to remain above their 2% target over the medium-term.
As a result, we expect a further three rate rises, each of 25 basis points, over our forecast—one in mid-2018 and two in mid-2019—bringing Bank rate to 1.25% at the end of 2019. However, this would still leave monetary policy very loose by historical comparison, particularly when also taking into account the Bank’s £435bn stock of asset purchases (which we expect to remain in place).
Against the backdrop of a rate rise, CPI inflation has risen to 3%, its highest in five-and-a-half years. However, we expect inflation to have peaked and for it to fall back gradually further ahead, as the impact of sterling’s past depreciation on prices fades.
Nonetheless, inflation remains above the MPC’s target throughout our forecast period, ending 2019 at 2.3%.
Households
Looking through distortions in car sales over the last couple of quarters (related to tax changes), household spending has been losing steam persistently over the past year. Much of this is likely linked to falling real earnings, which have been squeezed by a combination of higher inflation and tepid wage growth.
But with the labour market still fairly tight and set to remain so, we do expect a gradual pick up in wage growth ahead. In particular, our surveys continue to flag acute skill shortages in some sectors, which should put some upward pressure on pay. This is broadly corroborated by our members, who expect some modest pressure on pay from both ongoing recruitment difficulties and higher inflation.
However, we expect only a limited pick up in real earnings, both because inflation will fall back only gradually, and because weak productivity will continue to weigh on earnings growth. As a result, we still expect less support to the economy from household spending further ahead—in particular, its contribution to GDP growth almost halves between 2017 and 2018.
Investment
The ONS’ annual Blue Book revisions paint a better picture of business investment since the EU referendum—it is now estimated to have risen by over 1% in the past year, compared to a fall of 0.3% previously. However, the outlook ahead is more mixed: investment plans for the year ahead in our business surveys had been improving during 2017, but recently fell back to their level just after the referendum (which is nonetheless in line with the long-run average). This chimes with special surveys that we’ve conducted both in July and November, where around 40% of businesses have said that Brexit is negatively affecting their investment plans.
We expect uncertainty to bite on business investment growth ahead, with quarterly growth averaging just 0.2% per quarter through the year—well-below average growth of over 1% per quarter since 2010. Growth stabilises over 2019, settling at (a still tepid) 0.3%.
Trade
There are clear signs that UK exporters continue to reap the benefits of the lower pound and strong global growth. Indeed, our latest manufacturing survey showed that export order books were at among their strongest positions since the late 1970s. This seems to have been mirrored in official data, with exports (both goods and services) having risen by 6% since sterling’s decline in June 2016, although this has been matched by import growth, leaving the overall economic impact neutral.
Government’s white paper reveals flagship industrial strategy: The CBI has welcomed the Government’s industrial strategy white paper and calls for clarity on how to ensure all regions benefit from local industrial strategies. The Industrial Strategy white paper, which outlines the Government’s vision for the UK economy centres on actions to help put the UK on the path to stronger levels of productivity growth. The strategy aims to make Britain the world’s most innovative economy, create good jobs, increase earning power and to deliver a major upgrade to the UK’s infrastructure networks to boost prosperity across the UK and make the UK the best place to start and grow a business. To help underpin these aims, the Industrial Strategy white paper announced five foundations of productivity: ideas, people, infrastructure, business environment and places as well as four sector deals and the introduction of ‘Grand Challenges’. Joining these three strands together will be a monitoring body (similar in style to the OBR) to ensure that this Industrial Strategy delivers.
Brexit: FDF Comment: The UK has agreed to pay the bill, allow the ECJ a continuing role in upholding citizens’ rights and to creative wording on the Irish border which everyone can live with – for now. In return, the EU has given the green light to the bigger prize – detailed talks on transition and future trade. The 16 page statement confirms that ‘nothing is agreed until everything is agreed’ and that the points will form part of the final Withdrawal Agreement. Donald Tusk made clear in his remarks this morning that the UK would be expected to follow all EU law, including new laws, through transition. The more interesting questions now need serious Cabinet debate. The European Council will meet on Thursday and Friday (hopefully) to ratify the European Commission’s recommendation that Brexit talks proceed to phase 2.
Folic Acid: Following the letter from Health Ministers in Scotland and Wales, with the support of the Health Department in Northern Ireland, to Jeremy Hunt asking for the fortification of flour with folic acid, several Royal Colleges have written a letter to the Times with the same request. The increased media interest resulted in my speaking to the Times Health correspondent and being interviewed by Sky News. So far the Department of Health has responded that it will look at carefully at the advice and respond in due course. FoB will continue to monitor developments and respond accordingly.
Scottish Government Lobbying: From Monday 12 March 2018 all regulated lobbying in Scotland, as defined in the Lobbying (Scotland) Act, will have to be registered on Scotland’s new Lobbying Register (https://www.lobbying.scot/SPS/). Members need to be aware of this Act as it could have significant impact on engagement you have with MSPs through your own company.
Regulated lobbying means face-to-face communication (including via video conference) about Scottish Government or parliamentary functions with any of the following people:
• Members of the Scottish Parliament (MSPs)
• Scottish Government Ministers;
• Special Advisers; and
• the Scottish Government’s Permanent Secretary
The British Nutrition Foundation (BNF): have developed a new online course designed to give people without previous nutrition qualifications, and/or may work in the industry but not directly in a nutrition role, an understanding of nutrition and public health.
The course is entitled Exploring Nutrition and Health, and is normally £125 however there is currently a 50% discount until the end of the year. For more information on the course please click here: https://nutrition.training/courses/healthy-eating/exploring-nutrition-and-health/
This course is a follow-on from the BNF’s Introduction to healthy eating and nutrition course, for which there is also currently a 50% discount until the end of the year. For more information on the course please click here: https://nutrition.training/courses/healthy-eating/an-introduction-to-healthy-eating-and-nutrition/
To use the discounts, visit https://nutrition.training/, select the course and apply the following discount codes:
INTRO50 (Introduction to healthy eating and nutrition) – £32.50 (RRP £65)
EXPLORING50 (Exploring nutrition and health) – £62.50 (RRP £125)
For more information on any of the above, including requests for bulk discounts or having courses tailored to fit the needs of your business, please contact Melanie Hargraves at the BNF (m.hargraves@nutrition.org.uk).