GDP forecast upgrade from British Chambers

10th March 2015

The British Chambers of Commerce (BCC) has upgraded its UK GDP growth forecast for the next two years, from 2.6% to 2.7% in 2015, and 2.4% to 2.6% in 2016, due to stronger than expected growth in household consumption and services.

The latest forecast also makes the BCC’s first prediction for UK growth in 2017 – at 2.6%.

BCC Director General John Longworth highlights that consumer spending is a key driver for expected growth figures. John notes that consumption is a fickle friend of the economy – and that long-term, sustainable growth depends on boosting the contribution of business investment and exports. He goes on to warn politicians that two key metrics matter for the next government: business investment figures and improvements to the UK’s current account.

ECONOMIC FORECAST – OVERVIEW

  • BCC’s UK GDP growth forecast from 2.6% to 2.7% in 2015, from 2.4% to 2.6% in 2016 – and introducing its first-ever forecast for 2017 at 2.6%.
  • The upgrades mainly reflect stronger than expected growth in household consumption and services.
  • Quarterly GDP growth is expected to increase to 0.7% in Q1 2015, compared to 0.5% in Q4 2014.
  • The first increase in UK official interest rates, to 0.75% is expected no earlier than Q1 2016, two quarters later than the BCC previously predicted.
  • UK business investment is expected to grow 3.5% in 2015, compared to 6.8% in 2014. This is largely due to two consecutive quarterly declines in Q3 and Q4 2014. However, business investment is expected to grow 7.2% in 2016 and 7.4% in 2017.
  • Exports are expected to increase by 3.7% in 2015, and   2.6% in 2016 and 2017. The 2015 export forecast has been upgraded since the last quarter – when we predicted 1.9% in 2015 – due to a sharp increase in exports in Q4 2014.

John Longworth of the BCC said:

“While 2015 has got off to a good start, there is no room for complacency. The UK is still a long way from achieving the great, sustainable, long-term growth we want to see. Consumer spending is one of the key drivers in our growth upgrade. While there’s nothing wrong with consumer confidence, a balanced economy that will provide growth and jobs in the long-term, needs a much bigger contribution from business investment and exports. This year’s slowdown in business investment is a clear warning sign that politicians must do everything they can to create a stable and positive investment environment, and ensure businesses can get access to the finance they need.

“Whilst UK exports made welcome progress at the end of 2014, imports are still increasing at a faster rate – and our growing current account deficit remains a huge challenge. With an unsustainable, negative balance, we have a way to go to reach the government’s 2020 export targets, and to restore our current account to health.

David Kern, Chief Economist at the BCC, said:

“UK growth in the next three years, though lower than in the US, will be stronger than in the Eurozone, including in Germany and France. But our recovery is still facing risks, global as well as domestic. Globally, the Eurozone outlook is still precarious, while geopolitical tensions in Ukraine and in the Middle East may affect growth adversely. Domestically, productivity is still too weak and the budget and external deficits are much too big. There are also concerns over prolonged uncertainties in the event of an inconclusive General Election.”

OTHER ELEMENTS FROM WITHIN THE FORECAST

Main components of demand

  • Growth in household consumption is forecast to strengthen initially to 2.6% in 2015, before easing to 2.5% in 2016 and 2.2% in 2017.  These new forecasts are higher than in Q4.
  • The new forecast predicts UK business investment growth to be 3.5% in 2015, 7.2% in 2016 and 7.4% in 2017. The previous prediction for 2015 was 7.5% but this has been significantly reduced due to steep declines in investment, in the last two quarters of 2014.
  • The real net trade deficit will fall from 2.7% of GDP in 2014 to 1.6% in 2017, while the net deficit in current prices will fall from 1.8% of GDP in 2013 to 0.9% in 2017. The reduction in trade deficit is still too slow, at a time when other components of our current account, mainly the income balance, have worsened.
  • Exports are expected to increase by 3.7% in 2015, and 2.6% for 2016 and 2017. The 2015 export forecast has been upgraded since the last quarter – which predicted 1.9% for 2015 – due to a sharp increase in exports in Q4 2014.

Main sectors of the economy

  • The services sector is forecast to record growth of 3.0% in 2014 (Q4 forecast was 3.2%), 3.1% in 2015 (Q4 forecast was 2.9%), 2.8% in 2016 (Q4 forecast was 2.7%) and 2.8% in 2017. The share of services in total UK output is likely to rise a little further in the coming years.
  • Total industrial output is predicted to record growth of 1.4% in 2014, 1.2% in 2015, 1.7% in 2016 and 1.7% in 2017.
  • Manufacturing output: The new forecast predicts positive manufacturing growth of 1.8% in 2015, 2.0% in 2016, and 2.0% in 2017.
  • Construction output: In full-year terms, the BCC predicts construction output growth of 1.8% in 2015, 2.5% in 2016 and 2.2% in 2017.

Official interest rates

  • The first increase in UK official interest rates, to 0.75%, is forecast to occur in Q1 2016, two quarters later than we previously predicted.
  • Further modest increases in official rates can then be expected, in small 0.25 percentage point steps, with official interest rates reaching 1.00% in Q4 2016 and 2.00% in Q4 2017.

Unemployment and productivity

  • The new forecast predicts that the UK unemployment rate will fall from 5.7% in Q4 2014 to 5.2% in Q4 2015, 4.9% in Q4 2016 and to 4.8% in Q4 2017. These jobless rates are slightly lower than those we predicted in our Q4 forecast, mainly because our new GDP growth forecast is slightly stronger.
  • UK jobless total is expected to fall from 1.862 million in Q4 2014, to 1.715 million in Q4 2015, 1.628 million in Q4 2016, and to 1.603 million in Q4 2017, a net overall fall in total unemployment of 259,000 over the next 3 years.
  • Total youth unemployment (people aged 16 to 24) is predicted to fall from 740,000 (a jobless rate of 16.2%) in Q4 2014, to 605,000 (a jobless rate of 13.2%) in Q4 2017, a net fall of 135,000.
  • UK productivity has performed poorly since the financial crisis. The forecast envisages slower productivity increases in the next few years, than before the financial crisis.

Public finances

  • UK public finances: The public finances improved considerably in January 2015, and there is now a realistic chance that public sector net borrowing in 2014/15 will be marginally lower than the OBR predicted in the December 2014 Autumn Statement. We also expect the OBR’s target to be met in 2015/16.
  • However, the OBR’s timetable for subsequent years is still slightly too ambitious. While the OBR is forecasting that UK public sector net borrowing will move into a small surplus in 2018/19, our forecast shows that it will 1-2 years longer.

Inflation

  • In annual average terms, annual CPI inflation is forecast for 0.3% in 2015, 1.7% in 2016 and 2.0% in 2017. In Q4 we predicted 1.2% in 2015 and 1.8% in 2016.