UK business investment set to rebound and drive economic growth in 2014

11th February 2014

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Following a prolonged period in the doldrums UK business investment is set to bounce back and drive economic growth in 2014, rising at its fastest rate since 2007 according to the latest forecasts, writes Philip Scott.

Employer’s group, the CBI, in its latest economic outlook says it is now predicting GDP expansion of 2.6% this year, up from its November forecast of 2.4%, as a result of stronger-than-expected economic performance at the tail end of 2013. However the trade body’s forecast for 2015 has edged back from 2.6% to 2.5%.

Its bullish predictions are backed by its belief that business investment growth will rise from -3.7% in 2013 to 6.6% this year, and to 8.3% in 2015, supported by improving confidence among firms and low borrowing costs.

Net trade is also expected to play a small role in supporting growth this year and next. Import growth will rise, reflecting stronger domestic demand. Meanwhile, exports will also strengthen, as growth picks up in the eurozone and broader global economy.  Export growth is expected to rise from 1% in 2013 to 3.6% in 2014, and 4.7% in 2015.

John Cridland, CBI Director-General, says: “We are starting to see signs of the right kind of growth. In our view this is not a debt-fuelled, housing bubble-led recovery – our forecast shows encouraging signs that business investment and net trade are starting to play their part.

“More businesses are feeling inclined to invest in new technology and advertising. We can also expect to see more companies coming to market to raise finance and an uptick in merger and acquisitions activity as animal spirits return.

“But there is no doubt that business leaders are concerned about political uncertainty as we enter a lengthy election campaign. This could be a real mood killer when business leaders are faced with making big investment decisions in the months ahead.”

The CBI expects unemployment to have already reached the Bank of England’s 7% threshold in the fourth quarter of 2013, before falling further to 6.8% in 2014, at 2.2 and 6.6% by the end of 2015, at some 2.13m. However, with inflationary pressures likely to remain muted, and considerable spare capacity in the economy, the CBI sees no prospect of an interest rate rise until the third quarter of 2015 when it is forecasting the first 0.25 percentage point increase.

It also anticipates that the recent strength in consumer spending is expected to slow somewhat this year as improvements in confidence are unlikely to be sustained at the same pace. However, average earnings growth will gradually outstrip CPI inflation this year, which will increasingly provide a more solid foundation for consumer spending going forward its says in its report.

The CBI also said it expects house price inflation to rise by 6.3% this year and 5.2% next year, but said that much of the price increases seen in London and the South East are not being replicated across the country, and it reiterated its call for action to boost housing supply.

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