BCC Economic Forecast: 2016 Momentum Not Set to Continue

BCC - The British Chambers of Commerce (BCC) has today (Monday) upgraded its UK GDP growth forecast from 1.8% to 2.1% for 2016, and from 1.0% to 1.1% in 2017. However, it has also downgraded expectations for 2018 from 1.8% to 1.4%.

The leading business group upgraded its forecast for 2016 after the UK economy recorded stronger than expected growth in the third quarter. However, the current level of economic momentum is set to slow over the next two years, as continued uncertainty around the UK’s future relationship with the EU and higher inflation are expected to dampen growth in the medium term. 

Based on the data and our own Quarterly Economic Survey, the BCC does not expect the economy to enter into a recession.

The depreciation in the value of sterling since the EU referendum is expected to push up inflation, impacting both consumer spending and business investment. While average earnings are to hold steady, real wage growth is likely to be eroded by inflationary pressures.

The BCC expects UK public sector net borrowing to be £15.2 billion higher over the next three years than predicted by the Office for Budget Responsibility at the 2016 Autumn Statement, with slower expected growth likely to weigh on the UK’s ability to generate tax revenue.

Key points in the forecast:

•  UK GDP growth forecasts for 2016 is upgraded to 2.1%, but is expected to weaken to 1.1% in 2017 before picking up to 1.4% in 2018
•   The improved growth forecast for 2016 is driven by stronger than expected growth in Q3. Growth of 0.5% is expected in Q4 2016
•  GDP growth forecast for 2017 was upgraded slightly from 1.0% to 1.1%, but is still the weakest annual rate of growth since the financial crisis
•  GDP growth for 2018 has been downgraded from 1.8% to 1.4% with higher inflation curbing household consumption and more muted levels of investment, particularly business investment
•  Inflation is expected to breach the Bank of England’s 2% target next year, with a forecast of 2.1% in 2017 and reaching 2.4% in 2018. This is higher than our previous forecast of 1.6% and 1.8% respectively
• Weaker economic activity and erosion of real wage growth by inflationary pressures are expected to causehousehold consumption to slow down from 2.7% in 2016 to 0.6% in 2017 and in 2018
• Business investment is expected to fall by -0.8% in 2016, -2.1% in 2017 and -0.3% in 2018 – better than the previous forecast of -2.2% in 2016 and -3.4% in 2017, but significantly worse than the +1.9% growth previously predicted for 2018
• Export growth is set to slow from 4.5% in 2015 to 2.6% in 2016 and 2.3% in 2017, before increasing to 2.9% in 2018. This is partly in response to the effect of the falling value of the pound on exports being previously overstated
•  Looking at sectors, we predict growth in services at 1.7% in 2017 and 2018, while construction activity is forecast to fall by -2% in 2017. Manufacturing growth is expected to remain steady but muted at 0.8% over 2017 and 2018
•   Public sector net borrowing in the full financial year 2016/17 is predicted to be £3.8bn higher than the OBR predicted in the 2016 Autumn Statement

Dr Adam Marshall, Director General of the British Chambers of Commerce, said:

“In the absence of a clear road ahead, many companies have been adopting a ‘business as usual’ approach in the months since the referendum, which has kept conditions buoyant this year and prevented a sharp slowdown in growth.

“While some firms see significant opportunities over the coming months, many others now see increasing uncertainty, which is weighing on their investment expectations and forward confidence. Lower sterling and rising inflation are now starting to affect business communities and consumers across the UK. While a lower pound is a boon for some exporting businesses, many others see the latest devaluation of sterling less positively, as they are unable to benefit from it. 

“Given our findings, deeper incentives for both investment and exporting will be needed in the months and years ahead. As the Brexit negotiations commence, steps will need to be taken to help ambitious firms overcome the risks, real and perceived, borne out of political uncertainty. 

"It is imperative that government do all it can to help UK businesses overcome risk and take advantage of opportunities. Ministers should start by clarifying the future status of existing EU workers as soon as possible, to end the insecurity now facing employees and businesses alike."

Suren Thiru, Head of Economics at the BCC, said:

“We have upgraded our growth forecasts for 2016 and 2017, but the near-term outlook for the UK economy remains challenging, with the recent resilience in growth expected to weaken. That said, we do not expect the economy to enter into a recession over the next few years.

“Higher inflation and continued uncertainty over Brexit will weigh on the UK’s growth prospects, with consumer spending and business investment likely to be hardest hit. Average earnings should hold steady but inflationary pressures are expected to erode real wages, which will hit the spending power of households.

“Exports will continue to grow but at a slower pace, and the UK’s net trading position is expected to improve as import levels weaken. The decline in the value of the pound is likely to help some exporters, although the lack of responsiveness of UK exports to other sterling devaluations in recent years suggest that its impact on overall export growth has been overstated.

“Uncertainty remains over the longer-term outlook, but the UK’s structural imbalances, including the over reliance on services and household spending as drivers of growth, continues to leave the UK vulnerable to rapid changes in economic conditions.”

Source: BCC Press Office