Uncertainty over the UK’s future relationship with the EU is one factors that has weakened the outlook for business investment, says the British Chambers of Commerce (BCC).
A decline of -0.6% for business investment in 2018 is expected to be followed next year with growth of just 0.1%. The figures coincide with the repeated delays and lack of clarity on Brexit and future trading arrangements. Many firms have hit pause on investment plans.
The BCC forecast assumes that the UK will reach an agreement in negotiations with the EU, and avoid a cliff edge in the short term. Longer-term prospects are still uncertain, but this forecast assumes that a trade deal is reached, at least at outline level. Other scenarios would lead to revisions in the next forecast.
UK GDP growth is expected to slow to just 0.1% in the final quarter of 2018. The BCC’s forecast for 2019 GDP growth remains at 1.3% but has downgraded its 2020 GDP forecast to 1.5% (from 1.6%). The slide in the value of the pound together with weaker confidence levels is expected to stifle the contribution of net trade and consumer spending to UK GDP growth. Inflation is now expected to be higher over the forecast period as the weakness in sterling pushes up the cost of imports.
BCC is urging Westminster to come together to provide clarity on the UK’s future relationship with the EU, and avoid a disorderly Brexit.
Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said:
“The contribution of business investment to UK GDP growth is expected to be more downbeat than we previously projected as the increased uncertainty over Brexit weakens business confidence and stifles investment activity. Consumer spending is expected to be more limited as the weaker pound drives higher imported inflation over the near term, stifling real wage growth. A weakening currency is also expected to hinder, rather than help the UK’s net trade position by increasing imported input costs while a slowing global economy will limit export demand.”
Key findings in the forecast:
- 2018 GDP growth forecast marginally upgraded from 1.1% to 1.2%. UK GDP growth is expected to slow to 0.1% in Q4 2018 (down from 0.6% in the previous quarter). 2019 GDP stays at 1.3%, while 2020 is downgraded, from 1.6% to 1.5%
- Business investment to contract in 2018 by 0.6% (down from 1.0%), before growing by just 0.1% in 2019, and 1.2% in 2020
- Household consumption to grow at 1.5% in 2018, 1.2% in 2019 and 1.5% in 2020, compared to 1% in 2018, 1.3% in 2019, and 1.7% in the previous forecast.
- Average earnings growth to outstrip inflation but by less than the previous forecast, with growth of 2.6%, 2.7%, and 2.9%, compared with CPI inflation of 2.5%, 2.4%, and 2.2%
- BCC forecasts export growth of 1.4% in 2018, 2.3% in 2019, and 2.2% in 2020, down 1.7%, 2.7% and 2.9% respectively in our previous forecast
- We anticipate interest rates rising to 1.25% by the end of the forecast period, with rate rises expected in Q4 2019 and Q4 2020